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Are you thinking about going long JPY?

Which JPY pair should you trade?

If we look at the Overbought/Sold page on MarketMilk™ for the “JPY Pairs” watchlist, every JPY pair has reached Overbought levels on the Stochastic indicator! 👇

JPY Pairs Overbought on Stochastic

So the question is:

If all JPY pairs are overbought, which one should you short? 🤔

To help us answer this, let’s compare the strength of the JPY pairs at the market close today and find the weakest one. 👇

JPY Pairs - 102419

We can see that NZD/JPY was the weakest out of all the pairs in the watchlist (circled in purple).

Now that we’ve narrowed down our choice to see a single pair (NZD/JPY), let’s bring up its daily price chart. 👇

NZDJPY 1D 102419

As mentioned earlier, we can see the Stochastic indicator showing an “Overbought” reading.

We can also see that NZD/JPY traded near the 70.00 level but failed to breach this level.

It’s now trading around 69.30ish which is back below the previous swing high of 69.50 (yellow arrow).

So I see 69.50 as an immediate resistance level, and then 70.00 as the next (and stronger) resistance level due to the recent failure to break above it.

Trade Idea 💡

So here’s a trade idea:

Short NZD/JPY @ market (69.30).

Set a stop loss (SL) @ 70.26.

Why?

We need to give NZD/JPY some “room” for typical price fluctuations and don’t want to get stopped out prematurely due to market noise.

To know what “typical” is, we can use the Volatility page on MarketMilk™ for NZD/JPY and look up its daily volatility. 👇

NZDJPY Daily Volatility

We can see that over the past 30 days, NZD/JPY moves about 64 pips a day. 

So we have to factor this in when setting our stops. For example, I certainly don’t want to set a 60 pip stop loss because that’s within the daily normal price movement! 🤦

To be safe, let’s set a stop loss “size” that’s 1.5 times the average daily volatility of NZD/JPY.

So 64 pips x 1.5 = 96 pips.

Which means 96 pips would be our stop loss.

If we add 96 pips on top of our entry price of 69.30, our stop loss (SL) would be 70.26.

This is a good place for a stop loss because, in order to reach this price, NZD/JPY would have to rise above 69.50 (resistance area #1) AND 70.00 (resistance area #2).

If we get stopped out, we know we are definitely wrong!

But at least we are able to cap our loss! 😢

And not blow our account and survive to trade another day! 🤕

So now that we know where to exit if we’re wrong and limit our risk (very important!), what is our profit target?

Let’s take a look a look at the chart again. 👇

NZDJPY 1D 102419

A conservative profit target (PT) would be around the 50 SMA area, since the 50 SMA (purple line) will usually act as a dynamic support level.

I’d put this area around the 68.00 level

An aggressive profit target (PT) would be 67.50 level, which is the level where NZD/JPY double-bottomed previously.

For me, I prefer the conservative option.

The main reason being is that NZD/JPY is also highly correlated to the U.S. stock market. If the stock market goes up, NZD/JPY usually goes up as well.

And based on historical seasonal patterns, we’re getting near the time of the year where the U.S. stock market usually goes up.

Knowing this, it’s not the time to get greedy so I don’t want to be in this trade for too long.

So here’s a summary of the trade idea:

Short NZD/JPY at market (69.30) | SL: 70.26 | PT: 68.00

We risking 96 pips to make 130 pips. This gives us a 1:1.35 risk-to-reward ratio.

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.