Short

GBPJPY short on the horizon

Updated

Given the chart pattern and overextended nature of this pair I’ll be looking to short this cross if the pound continues to gain in strength.

A short entry on this pair will be taken with considerable caution due to the divergence in monetary policies. That being said, given the UK’s lacklustre economy I think further rate rises, although needed, will be increasingly unpalatable for the BoE and so any sustainable strength in the pound may be unlikely in the weeks to come.

On the 1d, I’ll be looking to see future divergences between the price and the indicators, which I’m not currently seeing. The delta is fast approaching a resistance zone if the price continues to rise. All of these points will likely converge if the price hits my point of interest 175 - 176 (green zone).

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The weekly chart clearly shows the prevailing trend is bullish. However, the current rising wedge pattern suggest a correction may be due which will take the price to the lower limits of the bullish channel.

The delta shows a great increase in buy orders in comparison to that of sell orders but is now in approaching a key support/resistance zone. The delta on the 4h is still moving within the confines of a rising wedge with slight hidden divergences showing.

I’m still expecting continued strength in this pair with a move towards my POI for a short position coming up within the next week. If that happens I’ll be looking for further confirmation in the indicators by way of divergences on the 4h which appear to be slowly forming.

I will update when I have a confirmed entry.

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I’ve also noticed a drop off in volume since Septembers disastrous mini budget which suggests underlying weakness.

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Trade 1 open at 175.209
Trade 2 open at 175.54

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Trade 3 opened at 175.735

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Pending order filled at 176 - trade 4

With potential bad news for short traders coming out of the UK this morning I would short with extreme caution. Especially as wage inflation and workers have both increased.

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Trade 3 and 4 each got stopped out at break even. I set this up to limit exposure after the price moved passed 175.55

As a result I opened 2 more trades at 176.25 and 176.52. That being said, please be aware that this trade has considerable risks going forward.

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Trade 5 opened at 177.05

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Sell order filled at 179.01. As traders we have no idea how over extended a move will become, when I was looking at this trade i had 180 in mind for the upper limits. As the price has moved against me my position sizes have increased to capitalise on the pullback. My tolerance for pain is quite high but never trade against diverging monetary policies. As I’ve said earlier, I feel the pound strength has its days numbered but if it rises much above 180.5 I’ll be closing this down.

Trade safe guys and galls

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Let’s see if I can manage my way out of this sh!t show.

So full disclosure, my hedges were triggered at 177.43 (break of structure) my 179 trade was hedged at at 180.45 (break of structure)

This is the risk I took when I decided to trade a pair with diverging monetary policies based on t/a. Please learn from my idiocy and never discount fundamentals.

Having said that, My challenge now is to manage my way out of this situation with my p/l intact. I’ll keep the post updated because most people post updates if they’re in profit or update if the sl is hit. I thought it may be of use to somebody to have a live example of managing risk in real time, when things go sideways.

For now, I’m fully hedged and will come back next week with fresh eyes and a more clear head.

Hope you all have a good weekend.

Note

I guess this has gone from being an idea on a trade to more educational so I apologise for providing really basic information that I’m sure most of you already know.

Before I enter trades I always do a plan of action. So where my entry is, where my TP will be, where my re-entries are, where my hedges will be and where my hedges will be closed. That way I don’t have to make rash decisions if things go wrong. I just stick to the plan.

As I’m sure you all know, trading can be stressful and sometimes you need to think fast and this trade setup is a perfect example of why having a plan of action is a must if you want your account to provide a return over time. It’s easy to make money in the short term, but longevity is the key that really matters.

Firstly you need to analyse why you want to hedge, my main reasons to hedge are to preserve capital and reduce risk exposure; for me, making a return is secondary. My hedged positions are not there to make money, they are there to preserve my p/l.

It’s really easy to open a hedge, the hard part is sticking with it. I’m sure you’ve likely experienced opening a hedge and then the market turning around and your hedge being in a large draw down… I know I have. For this reason I have my hedged positions based on price levels, NOT BALANCE DRAWDOWN. So for example, I won’t enter a hedge because my balance has a 15k drawdown, I’ll plan them at support and resistance zones, my balance, although important, is secondary to my support resistance levels (within reason) and break of structure points. So for this trade, both of my hedges were planned at break of structure zones as you can see in the chart.

This pair hasn’t traded at these levels since 2015 so to find suitable support/resistance levels you have to check back on the weekly. Right now is a potential support/resistance zone, my next one is 189. If I expect the price to turn back at approximately this location, then USUALLY I would close my hedge and enter another sell, but as this week is a big week for the pound I’m leaving them active and moving my long position stop to break even. After I know the outcome of this weeks fundamentals I will reassess. Maybe If the price managed to reach 189, maybe I would take the profit from my hedges and close them down and perhaps enter a sell at 189. But I would need to know the fundamentals before making a call like that.

I hope that makes sense so far.

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All trades are still active.

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Trade 7 - Pending sell order filled at 182.301

I’m more comfortable now I know the data. I’ve moved my hedge position stops back to break even

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As I’m sure you’re all aware, the more attractive the yield, the greater demand for the host currency. Generally speaking.

The chart above shows the 10y bond yields for both Japan (red) and the uk (blue). Since April the spread between the two yields has greatly supported the pound whilst the yen hasn’t been so fortunate. We saw a tick lower for the GB yield last week but we really need to see this spread close before we can expect any decent show of strength from the yen. Obviously that is always the case but in general I would to see this spread close.

The chart below shows a similar story. Highlighting the continued strength in uk 2y yields which is going to support the global demand for gbp. The jpy on the other hand shows a weakness in yields which could further weaken jpy pairs. If we see the closing of these spreads over the coming days and weeks then that would definitely support the argument for a show of strength in the Japanese currency.

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All trades STILL active.

Yields on the uk 2y and 10y bonds are still on the rise which is likely to keep the pound supported for now.

Chat below highlights the correlation between the price action and Gb10y gb02y yields.

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It’s been just under 2 months and I’ve finally been able to get out of this dumpster fire of a trade. Some of my trades got stopped out at break even so I won’t talk about those.

So my profit and loss…

My hedges were all set to close at break even plus swaps. I lost about 17 pips opening and closing hedges in short spaces of time so I’ll deduct those at the end All but one, On the 19th we got a cooler gbp inflation print so I closed out my first hedge position and took the profit.

Hedge 1 opened at 177.73, closed at 181.127 - 339 pips

My short positions had a tp of 176.5 as this was the top of the breakout candle that provided the last leg up. This Can be seen by the arrow in the chart I’ve attached.

1. 175.2 -130 loss
2. 176 -50 loss
3. 176.25 -25 loss
4. 176.52 2 pips
5. 177.05 55 pips
6. 179 250 pips
7. 182.3 580 pips
8. Hedge 1 339 pips
9. -17 pips

Total profit - 1004 pips

I guess this is a cautionary tale of not trading against fundamentals; but also how you can survive such mistakes, and profit from them, as long as you’re not over leveraged! …both financially and psychologically.

Trade safe and have a good weekend

jamesfrench73

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