GBP/JPY has recently established a new high on the year at 175.36, after breaking January’s 174.83 high. We saw a consolidation in 2014 with a structure similar to an ascending triangle. The relatively flat resistance showed that bulls were not strong, but the higher lows showed weaker and weaker bears. The breakout in June signaled bullish continuation.
This week, price has been retreating. With the bullish trend in place, and a new high only recently, traders could be looking to buy on this dip. Where might we monitor for this scenario to develop?
1) The daily chart shows a rising trendline from the 163.87 low on the year. If price comes down to this support factor and stalls, get ready for a buy. This is probably going to end up just above 172.
2) If the RSI nears 40 and stalls, take that as a sign the market is done with the bearish cycle, and ready for a bullish one.
3) With that being said, a stop-loss probably makes sense below the 172 handle, and support/resistance pivot. If the RSI falls below 40, the market is likely going back into consolidation.
With the 4H chart ,we actually see a potentially higher entry level then 172, which is like the last line of defense in this buy on the dip trade idea.
1) The 172.50 area is a support/resistance pivot.
2) The RSI is closing in on 30. If price stalls around 172.50, and the 4H RSI shows a bullish divergence around 30, get ready for a bullish continuation attempt.
The bullish outlook would have the 175-175.35 highs on the year in sight. Because of the prevailing bullish trend, we should anticipate the possibility of higher highs on the year. If price does rally back toward the 175.-175.35 area, consider scaling out and letting some runners get a chance to crack into newer highs.
Reward to Risk:
– Reward: If your entry is around 172.60 and the target is 175. The potential reward is 240 pips.
– Risk: A stop-loss at 171.60 would show a 100 pip-risk.
– The trade thus has a 2.4:1 reward to risk if entry is around 172.60.
Let’s say you add a position around 172.20, assuming you did not overload on the 172.60. The average entry price would be 172.40, and the risk would be 80 pips, while potential reward is 260, providing an R:R higher than 3:1.
For a trader these are attractive trades going in the direction of the prevailing trend. Just be careful when addition positions like this. Even though the R:R ratio improves, the loss would still be magnified if stop-loss is hit. On the other hand, the gains from a rally would also be amplified.
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