Shorting the AUD/JPY Pennant

Trade Idea: 2012-08-02 01:30

I happened to read Forex Gump’s dos and don’ts of trading the ECB rate decision and I realized that we have a major event risk on tap today. Since this event can cause large moves on the charts, I figured it could lead to some breakouts on the charts.

So I looked around, searching for a breakout setup that I could play. Low and behold, I chanced upon this gem on AUD/JPY:

On the 4-hour chart, you can see that the pair has been hanging just below a major resistance zone.


Zooming in to the 1-hour chart, I was pleased to find that a pennant had formed as well… the perfect opportunity to play a breakout, bros!


I decided to play this trade with a bearish bias because I think the markets could end up disappointed after today’s ECB rate decision. Of course, if that happens, we’ll probably see a strong sell-off on risk aversion.

Why the bearish bias, you ask? For starters, the ECB set the bar of expectations really high last week when ECB President Mario Draghi promised to preserve the euro, so the markets are expecting a lot from today’s decision.

From what I understand, the ECB probably won’t cut rates and won’t introduce another round of its LTRO program. The move that seems most likely is the revival of the Securities Market Program, which is iffy on its own since it doesn’t have the support of Germany. In any case, I don’t think this move will be enough to satisfy the markets and lead to new highs, so I’m siding with the bears.

But of course, I know there is a chance that the markets may extend their rally after the ECB decision, so I decided to set up my trade this way:

Sell stop at 81.80, stop loss at 82.60, profit target at 79.60.

I didn’t enter at market and instead set a sell stop below 82.00 so that if the market decides to go crazy and pop up, I’ll be safe from harm. My stop loss is just above the recent high.

As for my profit target, I’m aiming for the very bottom of the 4-hour range, though I’m open to exiting earlier if market conditions tell me to do so. I’m putting 0.75% of my account on the line because this trade offers a pretty sweet reward-to-risk ratio (2.75:1, son!).