Yen Suddenly Not So Tough
By Ed Ponsi, President of FXEducator.com
In last week's article, we took a close look at the Japanese Yen currency pairs, specifically at two setups; a double-bottom pattern on USD/JPY's daily chart, and an inverted head and shoulders pattern on GBP/JPY. Well, one week later, USD/JPY has soared by 400 pips in a relentless move higher, as the greenback finally gained the upper hand over the Yen (see figure 1).
Figure 1 USD/JPY blasts higher after forming a double-bottom pattern. Source: Trade Station
The greenback continues to be the currency that is perceived to be the safest in this maelstrom, which is really not saying much. In a country like Mexico where the Peso has collapsed, the buck is an obvious choice for storing wealth, and residents are fleeing the local currency. On March 4, Vladimir Putin felt the need to reassure the world that Russia's Ruble is not about to collapse. Considering the damage to the Ruble, the Peso, and other troubled currencies, it's easy to see why the USD seems like a good place to stash your cash. But while USD/JPY is reaching its highest point since November, GBP/JPY has struggled mightily as it attempts to break out of a bullish inverted head and shoulders pattern (see figure 2).
Figure 2: GBP/JPY is tries to break out of an inverted head and shoulders pattern. Source: Trade Station
As you can see, GBP is locked into a life and death struggle with JPY in the area near 140.00. Why would the GBP have so much difficulty working its way higher vs. JPY while the greenback cruises into the stratosphere? In a word, the answer is sentiment. Over the past six months or so, the British Pound has been the currency market's version of the 0-16 Detroit Lions, a currency unable to get out of its own way. However, unlike the stock of Citigroup or AIG, there is no threat of the GBP going to zero. GBP is probably undervalued on a fundamental basis here, but until this currency can show some sustained strength, there is no good reason to buy the Pound.
Question of the Week
Q) Hello Ed, first of all, your articles are very good, I may say even illuminating and I enjoy reading them. I intend to enter the Forex market and I am interested in your opinion on extremely long-term Forex pair trading. I am referring to the major pair combinations of EUR/GBP/USD/CAD/CHF/AUD/NZD. Long term for me is in monthly charts and entering trades with periods of month or even years (where the weekly and daily charts are used for fine tuning the entries/exits).
From back testing all these pairs I observed that during the last 10 years, I got between 4 to 8 trades per pair using a relative simple technique. The testing also showed that I have no need to be glued to the computer and I can pursue other activities as well. The profits also seem to be solid, my only issue is the relative large stop-loss needed and here I will appreciate your input - what stop-loss size would you recommend?
Ed Ponsi) Thank you for your email and your kind comments. It's refreshing to hear from someone who is looking at the market from a different perspective, in this case a very long-term one. And I thought I was a long-term trader! Although I've never traded off of the monthly chart, I do use the daily and weekly time frames frequently. I agree that using longer time frames allows a trader to have the freedom to pursue all kinds of worthwhile activities, and though we sometimes may lose sight of this, didn't we all get involved with trading so that we could enjoy more freedom? I think that most traders would list freedom as the number one reason for pursing this career in the first place.
Now to the specifics of your strategy; it's true that as a long-term trader, you'll need to use wide stops and targets. Fortunately, this doesn't necessarily mean that you'll have to risk large sums of money on every trade; instead, you have the option of trading fewer lots, mini lots, or even micro lots if necessary. For example, in a mini account, a one-lot EUR/USD trade using a 500 pip stop equates to a maximum potential loss of $500; in a micro account, a one-lot trade on EUR/USD with a stop that is 500 pips away from your entry point creates a risk of only $50! With this kind of flexibility, you can certainly use longer time frames without incurring the risk of a major blowout.
We really can't say that the strategy is complete or profitable until you've determined a method for placing the stop; after all, risk management is the most important part of any strategy. Without understanding the strategy's specifics, I can't really tell you how far away to place the stop as I have no real understanding of your methodology, or other important information such as the profit objective. You'll need to add specific rules for stop placement to complete the strategy, and then test it, before you can know if it really is a profitable strategy. Good luck!
Ed Ponsi
