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Talking Points:
- GBP/JPY Technical Strategy: Flat, long-reversal setup in previous article stopped out.
- GBP/JPY put in a major move lower on Monday and Tuesday of this week, moving back to a familiar support level at 184.29.
- With an unclear/undefined near-term trend, traders looking to trade GBP/JPY can utilize mean-reversion strategies until a more clear direction is defined.
In our last article, we looked at the prospect of a reversal play in GBP/JPY as price action had just run down to support of a near-term trend channel, and traders and the opportunity to look for attractive risk-reward ratios with top-side resumption. The basis for the play, as outlined in that article, was the prospect of getting a ~70 pip stop in a pair that can really show the fireworks should the trend resume higher. This could’ve opened the door for profit targets as far as ~285 pips away, offering a top-end 1-to-4 risk-reward ratio.
That did not come to pass as the selling pressure in GBP/JPY continued for the first two days of this week to bring price action back towards a very familiar support zone from 183.96-184.29. The price of 183.96 is a critical level on GBP/JPY, as this is the 50% Fibonacci retracement of the ‘big picture’ move, incorporating the 2007 high to the 2011 low. The 184.29 level has become interesting of late, as that was November low for much of the month, and has seen two re-tests over the past four trading days.
The level of relevance moving forward appears to be that long-term Fibonacci level at 183.96. Should price action remain supported above 184.29, traders can look for top-side plays with stops lodged below this key support level. To offset the approximate ~100 pips of risk that would be required to get stops below that 183.96 level, traders would likely want to target 186 or more to ensure a minimum 1-to-1. Reversal setups, no matter how attractive support may appear, are rarely beneficial over the long-term with less than a 1-to-1, and if you’d like to find out more on that topic, I highly recommend checking out our research series on Traits of Successful Traders.
On that front, for traders that do want to push the top-side reversal, profit targets could be sought out at 186.38, which is the 61.8% retracement of the most recent major move, followed by 186.87 which is the 76.4% retracement of that same move. This secondary profit target would allow for a 1-to-2 risk-reward ratio, which can be considerably more attractive for such reversal setups.
If 186.87 comes in, deeper profit targets could be sought out at 187.50 (major psychological level), 187.84 (38.2% Fibonacci retracement of the secondary move), and then 188.50, which is the 27.2% extension of the most recent major move, and the previous swing-high.
Created with Marketscope/Trading Station II; prepared by James Stanley
--- Written by James Stanley, Analyst for DailyFX.com
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