My Approach to Forex Trading #4 Trades on the GBPJPY

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My Approach to Forex Trading #4: Trades on the GBP/JPY

In this post I’d like to talk about some forex trades I made on the GBP/JPY in 2020 for those of you interested in further examples of how I approach spot forex trading. The GBP/JPY is well known as a volatile pair. There is a lot of movement of all timeframes, which I experienced when trading this pair for short-term binaries in the past (back when 24option accepted U.S. customers and had the GBP/JPY as one of its best-paying assets).

Finding solid price levels to trade on the GBP/JPY has been difficult lately because it’s mainly been an uptrending pair insteading of bouncing between levels. The British Pound has been one of the hottest currencies on the market recently and we’re currently seeing highs on the GBP/JPY that haven’t been seen since the late summer of 2008. As such, if the goal is to find Fibonacci retracement levels that could be effective for trading this market, I would have to find large-scale high and lows that encompass 2008 price data.

The only Fibonacci retracement levels I found suitable for my GBP/JPY chart at that time (and currently), ranged from 116.827-251.090, with that low being set in September of 2020 and the high being set in July of 2007.

During the summer of 2020, price hovered around the 23.6% Fibonacci retracement level (148.513) created from that price span. Back in April I had a sell limit order set at 148.513 in anticipation that this level could act as a resistance area and act as a price reversal. However, I was wrong and this trade was quickly stopped out as price emphatically flew right through it.

Once price settled above the 23.6% Fib, I began targeting that level for a buy limit order, believing it could act as a place where price could retrace back down to before resuming the uptrend. My trade first triggered back in June and went in my favor, but the market still kept on coming back down to the 148.513 level so it hit my trailing stop for essentially a break-even trade. A week later I manually entered myself into essentially the same trade (actually a bit below the 23.6% Fib level) and this too met the same fate as the earlier trade. About a month later it hit my trailing stop for a 50-pip gain, which is essentially negligible for long-term spot trades.

I got into a buy order trade at 148.513 again on July 31. Like the previous two buy order trades at the 23.6% Fib level, I had my stop-loss set at 146.244, just below the recent lows from last April. This is the level at which, if touched/broken, would likely invalidate my belief that the GBP/JPY was bound to go higher. I had my take-profit level set at 153.664, or at the top of the recent resistance level, which had seen multiple recent tests. However, I would later get rid of that and just use my trailing stops to dictate how much profit I would make. In my opinion, this is a fair maneuver when dealing with strongly trending markets when making highs or lows that haven’t been seen in several months or years. You simply don’t know of a reasonable price where price could reverse on you. Hence, sticking with trailing stops is your best bet.

The trade went in my favor much like the previous two trades. My first step is usually to place my trailing stop at break-even for any trade that goes in my direction. I did this after 100 pips was seen in my favor. Following this, on August 15 I set my trailing stop at 149.850, just below the 150 whole number, to lock in approximately 150 pips of profit.

Once 153.664, my original but now removed take-profit level had been breached in favor of new highs, I knew I finally had a great trade on my hands with this pair. On September 4, I adjusted my trailing stop higher to 151.985, locking in nearly 350 pips of profit. I adjusted this up again to 153.466 on Setember 9, and then all the way up to 156.524 on September 19, in rough accordance with the annual highs that had been seen back in May. My trailing stop was finally hit on October 4. In just over two months, I had netted roughly 800 pips from this trade after taking a net loss on my three previous trades after a relatively mild initial 225-pip risk (almost a 4:1 reward-to-risk ratio).

In the image below I’ve paired each of the trailing stops with the price candle that corresponds to the date at which I adjusted each stop (with blue arrows).

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So although we’re just four posts into my series of spot forex articles, you can see that the power of using Fibonacci retracements on the higher timeframes can be an enormously valuable tool to help find levels in the market to trade from. Fibonacci lines from the monthly and weekly timeframes work best. You might go months with price hanging between levels, so your trades using Fibonacci lines as the base might be infrequent, but if you play the trades right – that is, reasonably setting up stop-loss and take-profit levels and appropriately setting trailing stops as needed – they can be some of your best.

Trade Idea: GBP/JPY Short Play

Speculation is starting to rise on when we’ll get a rate cut from the Bank of England, prompting me to check out the price action in GBP/JPY.

GBP/JPY Short Play

Word on the street is that the Bank of England might be making moves soon to follow the stimulative actions from other major central banks recently. There’s even talk that action may be taken as soon as this week, far ahead from the next scheduled BOE meeting on March 26th. As always, we won’t know if a surprise rate cut comes until it does, but given what we saw from the Fed and BOC (0.50% interest rate cuts) last week, I’m going to take action now for what could be pressure coming soon for Sterling.

So, I’m looking to short the British pound and I’m looking to do it against the Japanese yen, which I think will likely continue to find buyers for now as coronavirus fears aren’t likely to go away any time soon. Also, GBP/JPY is a highly volatile pair, so not only could I possibly get in at a great price, but I think the potential gains could come fast if everything goes my way.

On the one hour chart above of GBP/JPY, we can see the pair is bouncing higher once against from the strong support area around 134.00. If the pair makes it up to the broken support area, I’ll look to short Sterling there as the odds are pretty good traders will be watching that area for another opportunity to short. My stop will be wide given the huge pick up in volatility, and my target will be the recent swing lows for what is a pretty strong potential return-on-risk. Here’s what I’m going to do:

Short full position GBP/JPY at 136.95, max stop at 138.75 with 1.00% max risk, max target at 133.05

I’ll be risking 1.00% of my account with a max potential 2.16:1 return-on-risk. If triggered, I will look to cancel early if the risk environment shifts positive strongly, and I will look to add to the position if it does go my way and the argument for Sterling weakness and/or yen strength grows. If my open orders do not trigger by the end of the week, I will close them down to reassess the idea over the weekend.

That’s it for now. Stay tuned for updates and as always, 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 simply follow what I do.

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.

Trading the Dragon: GBPJPY

The British Pound – Japanese Yen currency pair is a volatile offering that presents traders with potentially large moves in price relative to many other pairings. This currency pair is, at times, so volatile that it has earned the nickname of ‘The Dragon,’ as well as another well-coined term: “The Widow-maker.”

Whatever you call it, the fact remains the same: GBPJPY can really move.

Take, for instance, the initial throws of the Financial Collapse in 2008. While the EURUSD had, at one point, gone down by

3300 pips, the top-to-bottom move on GBPJPY was much larger: at one point a loss of more than a staggering 7000 pips.

Created by J. Stanley

This volatility can be a good thing, or it can be a very bad thing; depending on how you trade.

DailyFX Traits of Successful Traders

Exhaustive research was performed by DailyFX Quantitative Strategist David Rodriguez, examining more than 12 million trades placed by live traders. The goal of the research was to find out how traders were speculating, what wasn’t working, and what we, as an education and research group, could do to help.

The results of the research are shocking, and what was found was that the Number One Mistake that FX Traders Make often revolves around risk-reward ratios; that is, how much is lost on losing trades against how much is profited on winning trades.

From the research, David states:

“Traders are right more than 50% of the time, but lose more money on losing trades than they win on winning trades. Traders should use stops and limits to enforce a risk/reward ratio of 1:1 or higher.”

GBPJPY is an extreme example of this fact.

From our research, we can see that traders are correct a whopping 66% of the time on GBPJPY!

Prepared by David Rodriguez for the Traits of Successful Traders series

But exactly as David had found in the research, this robust winning percentage didn’t translate into profits; as traders took far larger losses when they were wrong than profits when they were right:

Prepared by David Rodriguez for the Traits of Successful Traders series

Traders win, on average, 52 pips on GBPJPY trades when they are right; but when they are wrong, they lose a monstrous 122 pips. From the above chart, GBPJPY is showing the lowest ratio of pips won v/s pips lost (on average).

This type of risk-reward ratio puts traders in a precarious position; as to be profitable over the long-term one would have to be right about 75% of the time (3 out of 4) to be able to hope for a net profit.

I don’t know about you, but there are very few things in life I want to expect to be right 75% of the time with; least of all anything that could cost me money when I am wrong.

Trading a currency pair like GBPJPY could be optimal for traders looking for volatility or large moves; but it should be noted that those moves aren’t always very smooth; which is exactly why overall profitability wasn’t higher on the pair.

The first point of emphasis is that given the above points, trading in GBPJPY should always entail a protective stop-loss order. Lack of doing so exposes the trader to significant risks as the pair may trend for an extended period of time.

Due to this volatile nature, and given the fact that the pair could trade with very wide swings in either direction, breakouts can be an attractive approach when trading GBPJPY. This will allow traders to maximize profits on the large swings when they are right; while also allowing them to cut their losses short as the big swings move against them.

With breakout strategies, traders are monitoring support and/or resistance; waiting for a break of the price level with the expectation that once the break is made – price will continue running in that direction, allowing for the maximization of profits in instances when the trader is correct (which is yet another reason stop losses are important, as those extended moves can cost significantly in instances when the trader is incorrect).

In the article ‘Price Action Breakouts,’ we looked at a mannerism for trading price-breaks without the necessity of any indicators at all, using price alone to denote support and resistance levels.

In the article, ‘Breakouts: How to Stay Away from Some Losing Trades,’ Jeremy Wagner introduces another indicator, price channels aka Donchian Channels, to help monitor price levels that may warrant future breakout opportunities.

For traders speculating in ¥-denominated currency pairs, Ichimoku may also be a relevant manner of analysis. Ichimoku is a popular technical system that was developed in Japan before World War II. Its staying power as a popular mechanism for initiating trades has continued, as the system is still widely in use today.

Ichimoku is often used as a trend-following system, but with a slight modification can be used to trade in breakout-style scenarios.

A large part Ichimoku is ‘The Cloud,’ which is a moving area of support or resistance plotted on the chart. When price breaks through either side of the cloud, the trader can often look to trade breakouts by placing a trade in that direction.

Created by J. Stanley

— Written by James B. Stanley

You can follow James on Twitter @JStanleyFX.

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