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Before you proceed, I suggest you go through my introductory post on the Weekly Winner. This will help you understand my framework.

Finished? Alright, cools beans, let’s go!

October 17 to October 21, 2011: GBP/JPY Price Action Review

GBP/JPY Hourly Chart

GBP/JPY started the week off on a rough note as overall risk aversion and poor Chinese GDP figures knocked the teeth out of higher-yielding currencies. This sent GBP/JPY, which actually tested the PWH at 122.64, diving all the way down to the 120.00 MaPs.

However, this proved to be a solid support level as GBP/JPY recovered and managed to trade above the support zone for the rest of the week.

The pair got a nice boost from an improvement in overall risk sentiment, as well as good monthly retail sales growth figures. By the end of the week, GBP/JPY even retested the WO, which held as a good resistance point.

Now, if I hadn’t kept my downward bias and my short sell orders at 122.00, I probably could have recognized that the sell-off from the first two days was overdone, and could have taken a flyer on a buy position. After all, 120.00 is a major psychological figure and it was just below the bottom WATR.

We could have gone long at the candle close just above 120.00, with a tight 40-pip stop. After all, if price were to dip below 120.00, it would basically signal a potential strong move down, so a wide stop might not have been necessary. We could have set our profit target at the WO at 121.90, which would have gotten hit on Friday. This would have resulted in a 175-pip gain, good for a 4.4:1 reward-to-risk ratio! Sweet!

Of course, that would have entailed getting a little lucky and being brave enough to hold the position open for a few days. A more viable profit target could have been the 121.50 MiPs, which served as resistance as well. Taking profit at this point would have still given us a 3.4:1 trade, which isn’t bad at all.

Were any of you able to catch that bottom on GBP/JPY?

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