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Forex Trade Idea: 2014-04-09

Big moves in the Japanese Yen this week, bringing USD/JPY to a possible opportunity for forex traders who are long-term bullish on the pair.

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 4 Hour Forex Chart
USD/JPY 4 Hour Forex Chart

The market has be in risk-off mode since last Friday after a somewhat positive NFP report (Feb. upward revision and increase in participation rate) had the chain reaction effect of supporting more Fed Tapering, which means risk-off behavior (i.e. Japanese yen rallies by forex traders). And with the Bank of Japan not taking any new action to increase stimulus in yesterday’s meeting, currency traders took this as a cue to buy up the yen more in a big way.  I think the moves in the yen over the last few trading sessions are near overdone, plus it brought USD/JPY to a strong support level that’s interesting enough to play my long-term bullish bias.

On the four hour chart above, we’re seeing a retest of a strong support level that’s held all through 2014 so far.  If retested and it holds, it could be an opportunity for me to play the long-term trend higher in USD/JPY and the monetary policy divergence of the Fed reducing easy money policies while the BOJ holds on to theirs.  Plus, with the sales tax rate hike coming for Japan this month, the positive economic numbers the Bank of Japan cited yesterday may no where to be seen by the end of the year.

So, I’ve decided to take a really small position at current levels for a potentially long-term trade.  The risk to this trade is that broad risk-aversion flows will continue, which is why I’m going with a wide stop to weather any further volatility.  But like I mentioned earlier, after a 2% drop from the 104.00 handle, this move may be overdone, so I think I’ll be okay.  Here’s what I am doing:

Long USD/JPY half position at market (101.90), stop at 100.35, max profit target at 105.00

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 0.50% of my account on this one, and with this trade structure, I have a potential reward-to-risk ratio of about 2:1.  I think 105.00 is a doable target, but it will have to get through a strong area of interest at 103.00 to get there.  If it does break through convincingly, I’ll look to scale in and trail my stop to enhance my potential reward.

Of course, anything can happen in the forex markets, so if the story changes I’ll be sure to reassess and adjust quickly if necessary. Stay tuned by following me on Twitter and Facebook!

This content is strictly for informational purposes only and does not constitute as investment advice. Trading any financial market involves risk. Please read our Risk Disclosure to make sure you understand the risks involved.