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A Rare Range Trade in the Ever-Volatile GBP/JPY

A Rare Range Trade in the Ever-Volatile GBP/JPY

2014-04-29 15:45:00
Kaye Lee, Head Forex Trading Instructor

Talking Points:

  • Triangle Consolidation Pattern in GBP/JPY
  • Key Resistance Zone for Initiating New Shorts
  • 2 Important Risk Factors to Consider Carefully

GBPJPY is known especially for its volatility, yet for most of this year, the pair has been consolidating in a triangle pattern, and today, price is heading higher as part of that triangle pattern and testing a very well-defined declining line of resistance on the daily chart.

This line of resistance is particularly powerful, as it is the site of four very clear prior touches. This is exceedingly rare in the forex world, and as this is the first break beyond this line, it is reasonable to suspect there will be sellers moving in on the assumption that the consolidation will continue.

Guest Commentary: Daily Triangle Consolidation in GBP/JPY

Price is now testing the upper boundary of a triangle consolidation pattern on the daily chart of GBP/JPY.

Whether the consolidation will materialize, of course, is anyone's guess, but the most appealing trade at this point is certainly on the short side. A move to the bottom of the triangle could contain nearly 200 pips, if not more. However, one key risk is that the weekly trend (not shown) is still up. Nonetheless, with such a well-defined pattern, it is worth at least attempting a short while also understanding that doing so carries slightly-higher-than-normal risk.

The triangle pattern makes it somewhat trickier to estimate a zone of resistance, but there are two clues:

  1. Price has already pierced the resistance line, and any capitulation should occur soon, and…
  2. It is possible to derive an approximate zone of resistance based on previous highs on the four-hour chart below.

As shown, the final resistance zone emerges as 172.87-173.38. This zone is 51 pips deep, which still makes for attractive overall risk profile.

Guest Commentary: Key Resistance Zone for Selling GBP/JPY

Previous highs on the 4-hour chart of GBP/JPY help define the key resistance zone for initiating new short positions in the pair.

The hourly chart below gives reason for pause, however, as it is exhibiting a relatively steep climb into the zone of resistance. In fact, it has already once interacted with it, giving a bearish engulfing candlestick that failed to turn the trend lower.

Guest Commentary: Contentious Signal on GBP/JPY Hourly Chart

Momentum and a failed bearish engulfing pattern on the hourly chart of GBP/JPY are among the key risk factors to consider for new short positions in the pair.

Nonetheless, that bearish engulfing pattern sufficiently suggests the presence of sellers, even if they are not yet in control. However, this taken alongside the fact that the weekly chart is in an uptrend must be considered carefully when looking to short GBPJPY. As a result, it is best to wait for price to make a new high before trading any new reversal triggers, which would include bearish reversal divergence, pin bars, and/or bearish engulfing patterns on the hourly time frame.

This being the infamous GBPJPY, it may certainly take two or even three attempts to hop on this trade, which would work well should the pair turn swiftly downward.

By Kaye Lee, private fund trader and head trader consultant, StraightTalkTrading.com

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

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