Will fundamental themes and potential reversal patterns draw in sellers?
Long-term Short on GBP/JPY
Forex traders have seemed to turn their back on the British pound this past week as Brexit uncertain has risen dramatically, as well as dovish commentary from the Bank of England warning of bigger risks for the U.K.
And based on this week’s Brexit headlines (e.g., U.K. Publishes Legislation That Breaches International Law, Brexit deal never made sense, Boris Johnson to tell EU, No-deal Brexit is the most likely outcome of trade talks, former EU chief says), I think this theme will likely persist given the tone of both sides, and will likely continue to bring pressure on Sterling for the foreseeable future.
I’m going to play this environment with GBP/JPY as the market retests a falling ‘highs’ pattern on the weekly chart.
We’ve also got the Stochastic showing overbought conditions, and on the weekly timeframe, this is a pretty strong signal of a potential reversal back to the downside (the last three overbought signals preceded a reversal back to the downside).
I also likely playing Sterling against the yen on the idea that we may see a turn in broad risk sentiment towards negative, as uncertainty grows with Brexit, the U.S. elections, geopolitical tensions between China and the U.S., and how well the world contains the COVID-19 pandemic, especially as the potential for the virus spreading accelerates as economies open back up and the weather cools.
So, with that thesis in mind, I’ve decided to short GBP/JPY and since this is meant to be a longer-term position (one to two-month hold), my stop will be wide (two weekly ATR/above the falling trend line).
My target is the 2019 and 2020 support area, for a strong potential return-on-risk. Here’s what I’m doing:
Short full position on GBP/JPY at market (138.04), max stop at 143.60 with 1.00% risk, max target at 124.00
I’m only risking 1.00% of my account and I’ve got a solid potential return-on-risk of over 2.51:1 to start. I plan on adding to this trade/rolling down my stops if the pair falls lower and if the themes continue to favor a bearish position.
And of course, if the story changes for either currency, I’ll be sure to cut the trade away quickly and move on to the next one.
Be sure to manage your risk and avoid overexposure.
What do you guys think? Are you watching GBP/JPY for a potential short position as well? If so, what’s your entry strategy and risk tolerance? Let me know in the comments section below!
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