Short-term Breakout on USD/JPY

I’m going with a low-risk, breakout setup on USD/JPY ahead of the U.S. Non-Farm Payrolls number.  What do you think of my forex trade idea?

Before you move on, for those who are not familiar with my framework, signals, setups, or acronyms, please visit my discretionary trading framework blog.

USD/JPY 1 Hour Forex Chart

USD/JPY 1 Hour Forex Chart

I haven’t done a short-term trade in a while, but what better time to jump back in than on a nice setup on USD/JPY with the U.S. Non-Farm Payrolls report as a catalyst for big movement.

On the one hour chart above, we can see that the pair has been in a downtrend since the beginning of the year thanks to risk aversion flows sparked by the Fed Taper and emerging market worries.  Today, we’re seeing consolidation (typical behavior ahead of big economic events) around a falling trendline and the 61% Fibonacci retracement area.  This pattern suggests that the bounce higher has run out of steam (i.e., the supply of buy orders is back near that of sell orders).

Of course, I wanna see a confirmation that the market will move lower through a breakout of the Asia/Europe consolidation to the downside, and I think we’ll most likely get a breakout today with the U.S. jobs data out at 1:30pm GMT (8:30 am ET), the mother of all economic data releases!  This event typically sparks quick moves, winning traders to jump for joy, and losing traders to go home crying to their mommies!

The expectation for this number is that we’ll see a bounce back from December’s weak read of +74K net jobs to around +183K in January and the unemployment rate to hold at 6.7%; revisions to previous numbers are also very important to watch as well.

Now figuring out exactly what we’ll get and how the market will price this in is nearly always a crapshoot, especially given the complexity of how the actual number may come out versus past revisions, how the Fed may factor the results into their Taper plans, how this will play out in terms of broad market risk-on/risk-off behaviour, and the wacky seasonal factors.

I am biased to the downside because of the recent price trend, how the ADP number came out weaker than expected (175K vs. 227K in Dec.) and that Challenger job cuts rose by 11.6%.  But to be safe,  I’ll just let the market come to me and try to ride the momentum with a breakout setup. Here’s what I am going to do:

Short quarter position USD/JPY at 101.80, 80 pip trailing stop, max profit target at 100.00

Remember to never risk more than 1% of a trading account on any single trade. Adjust position sizes accordingly. Create your own ideas and don’t follow what I do. Risk Disclosure.

I’m only risking 0.25% of my account on this trade with a trailing stop to reduce my risk if the market goes my way. I have a pretty big profit target in case we do see a big miss and risk-off reaction; with this setup, it’s a potential return-on-risk of 2.25:1.

Finally, this event carries this risk of whipsaws and slippage on entry, which is why I went with a pretty wide stop and very, very small risk.  I’m not looking to hit a home run here, but it would be nice to make a little extra cash on a legit opportunity going into the weekend, right?

Anyways, I’ll stick close to the charts for this event and adjust my orders/position quickly if necessary.  Stay tuned by following me on Twitter and Facebook!