USD/JPY for a Position Play – Trade Closed

Trade Closed: 2012-05-23 00:03 ET

It has been an interesting last 20+ hours for the Japanese Yen. And while the BOJ didn’t play out as thought it would–this time–it was a surprise announcement from Fitch that helped my idea turn into a positive outcome.

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

PCDPOD20120522.review.png

To review the session, I threw up the 15 minute chart above of USD/JPY to show the reactions to this week’s main events for the Japanese Yen: the Fitch downgrade of Japan and the Bank of Japan’s monetary policy decision.

During the Tuesday morning European session, Fitch issued a broad set of downgrades on Japan based on the already high, and rising, public debt ratios. We saw a knee-jerk reaction of Yen selling on the event, eventually pushing the pair up to the major psychological level of 80.00 by the middle of the US session.

The pair did hold in that area as traders awaited the Bank of Japan monetary policy announcement, and once they announced no changes and no surprise, unconventional moves, it was back into the Yen for traders. Since the events didn’t play out as I had anticipated, I closed my position at market at 79.61.

Total: +21 pips/ +0.16% gain

Is there anything I could have done differently in retrospect? Of course, I could have closed out or reduced my position size as soon as the pair showed resistance at 80.00, but the basis for the trade was that we may see a surprise, unconventional move from the BOJ. If it had gone my way, it would have obviously been a great day for Yen sellers, and if it didn’t, I was well protected to the downside; either way, I wouldn’t have known until we got the announcement. That’s why I waited until after the announcement to close my trade or make an adjustment.

Overall, I think I played it well even though I left about 50 pips on the table. I always look at trades from a risk-to-reward perspective, and since the upside far outweighed the downside (especially since I already had a profit), I think I was right to keep it on. Finally, I think the scenario I laid out is still a valid one we may see this summer, so I’ll continue to hold onto it as a play for down the road and keep an eye out for that surprise BOJ event.

Well, the week is still early, and there’s still plenty of market events to be traded. As always, follow me on Twitter and Facebook for my observations, thoughts, and new ideas. Thanks for checking out my blog, good luck and good trading!

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Trade Idea: 2012-05-22 01:11 ET

Good morning! For my trade idea this week, I like a technical setup on the USD/JPY daily that may be supported by another potential monetary policy event from the Bank of Japan. Is it time to sell Japanese Yen again?

PCDPOD20120522.png

Technically, the pair is at the 61% Fibonacci retracement of the strong move we saw starting back in February. Also, we see a divergence between price action and the stochastic indicator, hinting on a potential reversal to the upside. But that’s only part of the reason why I like a long trade on USD/JPY…

There’s a lot going on with the Land of the Rising Sun and its currency recently, which may setup another big move depending on what we see from the Bank of Japan meeting this week.

This week is the Bank of Japan’s (BOJ) monetary policy meeting and statement (Approx. at 1:00 GMT on 5/23). As usual, no one is expecting a change in overnight rates (which can’t get much lower than its current 0.10% rate) but the question that could spark a big move is will we see an increase in stimulus? Most analysts don’t predict a change this week, but we could see something new in their July meeting. So, the likely hood of a strong move looks to be a low probability and possibly priced in at this point. But what if the BOJ does something unconventional once again?

Back on February 14, 2012, the BOJ recognized that more cash by itself wasn’t doing the job, so not only did they throw 10T Japanese Yen in asset purchases at the market, but it also adjusted its inflation target to 1.0%. These surprise actions sparked the strong directional move that we see on the daily chart above, where USD/JPY topped out around 84.00–a huge 10% move!

The global environment has turned extremely negative in recent weeks (Grexit, weakening US and China data, and the list goes on and on), pushing capital out of “risk-on” assets and back into “risk-off” assets like Japanese bonds and the Yen. This has caused the Yen to rise to levels that make it extremely difficult for Japanese businesses to be globally competitive, and I’m sure by now the BOJ is getting pressured by Japan’s top business leaders to do something about it. This situation, coupled with the recent development that a Grexit is near (possibly sparking contagion), could lead to an unexpected, unconventional move from the BOJ very soon.

What that move could be, I don’t know, but I do know if we do see it, it could mean another big sell off for the Japanese Yen. If we don’t see an unconventional move, the pair will likely drift lower in line with the current risk-off sentiment. Based on those two scenarios, the risk-to-reward for going long USD/JPY looks attractive to me, so here’s what I am going to do:

Long USD/JPY at market (79.40), stop at 78.10, profit target at 84.00

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

This trade setup targets the previous top as I don’t think we’ll see another 10% rip higher, but it gives me around a 3.5:1 potential return-on-risk which is still very attractive. Of course, with so many different issues around the globe, sentiment can shift on a dime, so be sure to follow our Forex calendar for important upcoming events for both currencies.

Also, be sure to follow me on Twitter and Facebook for updates and adjustments in case I see the BOJ event play out differently than I think it will. Good luck, good trading and thanks for checking out my blog!

  • alwjmonster

    things are getting messy over the global.. and base on your technical setup i think spotting divergence in long period like daily always lead to lag. as i reckon you do not “long” so early, cause we don know BOJ would put effort base on risk off sentiment.. cause to lower the yen it might putting much more effort during risk aversion. even adjusting anything to lower yen would be resulting “little”. just my 2cent. I apology again for weak my english cause I’m an asian boy..

    • pipcrawler

      Thanks for your thoughts alwjmonster!  And no worries about your English; it’s way better than my attempts to speak any other language haha.

      Of course, no one knows, but the BOJ, of what they will do, but I think long USD/JPY has a higher probability of happening based on what’s going on and past price behavior.  Is that a guarantee, heck no,  but it does put the odds in our favor and give us an edge. 

      We can’t control what the market does, but we can control how well we are prepared, right? :)

  • pipineck

    I traded this too- I have just switched to trading the daily TF and use 4 hour for confirmation. I only use 8 & 20 EMA. I Entered last night at 79.96, SL 80.18 (+ 5 pips from previous days high + just above 20 EMA), TP 79.23. Ratio 1:3.3. I used to trade smaller TF like your good self but found timing the entry difficult and kept messing with the trades. You still made profit so well done. :) 

  • Camelman

    Hi, since you usually close orders before the weekend, you expect that the pair will reach 84 by Friday? or you are willling to keep pair over weekend and take a chance nothing will happen? Thanks

    • pipcrawler

      I planned for the best case scenario by going for 84.00, but the likelyhood of that happening this week is probably pretty small. Will I keep it open over the weekend? Depending on what the BOJ does today, I may just close it by the end of the Asia session. Stay focused AND flexible!  :)