It’s been a hot minute since I’ve had a trade on in the markets, but it looks like the time may be right to play the pair I’ve been watching for a while now: USD/JPY.
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I’ve been bullish on USD/JPY for a while now, but held off on entering a long position due to the risk-off moves sparked by the emerging market “mini-crisis” in January. The fear seems to have bottomed out and now I can play the diverging monetary policies between the Federal Reserve and Bank of Japan.
Just to quickly recap: according to new Fed Chairman Janet Yellen, the Fed is on the path of reducing their easy monetary policy programs, while the BOJ is on the path of increasing theirs. Just today, the BOJ announced plans to increase their lending programs in Japan, expanding their easy money policies. This divergence should theoretically lead to USD/JPY moving higher over the long-term, which I’ll try to ride if it does play out that way.
Technically, we saw the pair fall from 105.00 to 101.00–an area of previous resistance, now possibly support? Also, 101.00 -102.00 is the 50% Fibonacci retracement area of the move from 97.00 in October to the recent 105.00 swing high in January. I’m gonna guess that technicians are watching this area closely and that buyers are already nibbling around here, as shown by the bounce higher from 101.00.
So, I decided to go long at market in this area after today’s BOJ action of expanding their lending programs, with a stop near the recent swing low. I figure if it does get back down there, then something must be up and I should get out and reassess. My max target is the next major psychological area not seen since the summer of 2008, and it’ll probably be a bumpy ride on the way there. Here’s what I’m doing:
Long USD/JPY half position at market (102.50), stop at 100.85, max profit target at 110.00.
I’m only risking 0.50% of my account on this one, and with this trade structure, I have a potential reward-to-risk ratio of about 4.5:1. I also plan on adding to this trade and trailing my stop if it does go my way to maximize my profit potential safely.
There are two major risks to this trade that I see at the moment: 1) if the Fed stops or reverses their Tapering plan and 2) further global economic weakness sparks risk aversion once again. At the moment, I think both scenarios are low probability but could quickly change, as what we saw with emerging markets in January.