USDJPY Continuing to Channel Lower? – Trade Closed

Trade Closed: 2010-08-13 11:48 am ET

PoD Chart

USDJPY ultimately did not move my way this time as the pair touched the top of the falling channel, dropped and narrowly hit my first profit target before rallying. The rally was enough to break the upper end of the channel and move to my stop.

Stopped out at 86.10

Total: -50 pips/ -1.0% loss

Looking back, I recognized the higher “lows” and thought I should’ve closed down early, but I thought the trend was strong enough to continue to at least retest that major psych level of 85.00. Unfortunately, the pullback was enough to break that technical setup.

Overall, I’m happy with the trade as it was a good setup and plan, the market just didn’t go my way this time. Again, it’s the summer so I think I just need to do a better job of adapting to the changing conditions when sentiment shifts between directional and rangebound volatility.

Thanks for checking out my blog and I hope it helps you understand the market better for your own trading. Good luck and stay tuned!

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Trade Idea: 2010-08-11 11:28 am ET

PoD Chart

Good morning Forex friends! Well, it looks like slowing growth in China and the Fed’s pessimism on growth has brought some volatility to the dog days of summer. Will this reaction in the markets bring another opportunity to short at the top of the USDJPY channel?

I have the one hour chart up above, and we can easily see the pair channeling lower, but bouncing higher at the moment. I threw up a Fibonacci retracement tool to help me find potential resistance levels in the trend lower and I can see the 61% Fib line up with the top of the channel. I look to short there as think a lot of traders will be checking that area out as a point of interest to place their orders, and hopefully for my trade, more sell orders than buy orders. Stochastics have yet to indicate overbought conditions, so I think the market may make it up there as the US Dollar rallies like a raging bull today….

And why is the Greenback the flavor of moment? Well, you can thank China’s output growth and retail sales weakening, along with a worried outlook from the Fed as employment remains weak, housing is still in a slump, and credit is still tight in the US. With issues coming from the world’s largest economies, it’s back to risk aversion mode which means a rush into US Treasuries–great for the Greenback as foreigners need to convert to US Dollars to get into US government bonds. And with the Fed moving money from mortgage back securities to long term Treasury debt, then why not go where the money is flowing? (To read more about this, check out Forex Gump’s lastest blog post)

So, I think the overall driving force is pessimism on global economic growth, and while the reaction is extreme at the moment and may subside, it will continue in the short-to-medium term. This has bearish on USDJPY as this pair tends move in correlation with risk aversion.

I plan to short in between the 50% and 61% Fib area, and my stop will be above the channel and the next major psych level of 86.00. My target will be this week’s low, and I will take half of my position off around the 85.00 handle. Here’s what I am going to do.

Short USDJPY at 85.60, stop at 86.10, pt1 at 85.10, pt2 at 84.75

Remember to never risk more than 1% of a trading account on any single trade. Adjust position sizes accordingly.

I plan on closing this trade out at the end of the week, but as always I will stay alert and adjust my strategy according to price action. We may see more volatility from US initial claims and CPI at the end of the week. Stay sharp! If the pair is able to strongly break 85.00 area (15 year low and will BOJ allow the Yen to strengthen further?), I may hold on and trail my stop. Stay tuned!