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A EUR/JPY Trade You Can't Set and Forget

A EUR/JPY Trade You Can't Set and Forget

Kaye Lee, Head Forex Trading Instructor

Talking Points:

  • Weekly Divergence on EUR/JPY Chart
  • False Breakout on the Daily Chart
  • 2 Ways to Trade EUR/JPY on the Hourly

A simple glance would convince most that EURJPY is in a weekly uptrend, as shown below. However, there are signs of progressive slowing on this chart, as evidenced by the higher highs in price and the lower highs in the corresponding stochastic.

In particular, the persistent nature of this divergence—which has already occurred twice and is primed to happen again—suggests that EURJPY could be ready to begin a consolidation in the next few weeks.

Guest Commentary: EUR/JPY Weekly Uptrend in Jeopardy

A_EURJPY_Trade_You_Cant_Set_and_Forget_body_GuestCommentary_KayeLee_October24A.png, A EUR/JPY Trade You Can't Set and Forget

It would be ideal if price could bulldoze right through the short-term rising trend line and drop straight to longer-term support, but even a small move could provide interesting opportunities for intraday traders.

The daily chart is also encouraging. There has been a pop up above resistance from the previous high, followed by a quick thrust lower. This is enforced by the bearish engulfing candlestick pattern.

As the false breakout pattern is one of the go-to set-ups for professional traders, this certainly presents an opportunity go to short at least to the short-term rising trend line.

Guest Commentary: False Breakout on EUR/JPY Daily Chart

A_EURJPY_Trade_You_Cant_Set_and_Forget_body_GuestCommentary_KayeLee_October24B.png, A EUR/JPY Trade You Can't Set and Forget

Nonetheless, given the countertrend nature of this set-up, a shorter time frame is preferred to account for the fact that the move may well be short-lived.

Guest Commentary: Trade Scenarios on EUR/JPY Hourly Chart

A_EURJPY_Trade_You_Cant_Set_and_Forget_body_GuestCommentary_KayeLee_October24C.png, A EUR/JPY Trade You Can't Set and Forget

There are two possible ways to trade this situation:

  1. Breakout: The easiest would be the breakout short after the pullback on the hourly chart. Price is currently in a consolidation pullback pattern, as marked with the short support line on the hourly. A break lower would indicate momentum resumption to the downside. To be conservative, a Fibonacci expansion calculation has been made, identifying the support zone as being between 132.45 and 133.20. Due to the choppy nature of breakouts, it would be advisable to use a filter to confirm the downward move before entering, such as a close below Bollinger bands on standard settings on the hourly chart. This set-up would give at least 1:1 risk/reward ratio to the top of the supportive region, and potentially much better if price went to the rising trend line. Traders would be well-advised to trade with caution when prices approach the support zone, and to abort the trade should any adverse price action (such as bullish candlestick patterns) occur.
  2. Deep Pullback. Those who prefer the notion of better reward for risk can trade the deep pullback, as shown by the alternative arrow on the chart. Resistance from the daily chart, together with some room for error, provides a zone of price potentially turning at 134-59-134.92. This requires a higher level of skill to trade, but it can be traded using the 15-minute chart and classical reversal patterns such as head and shoulders, 1-2-3 tops, lower highs and lower lows, and divergence. The exact entry will depend on each trader's preferred trading style.

It is worth re-highlighting the fact that this is a countertrend trade, and although the set-up is solid, trade management can prove crucial to whether or not this turns out profitably. This is certainly not one of those “set-and-forget” trades!

By Kaye Lee, private fund trader and head trader consultant,

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.