Trade Idea: NZD/JPY Channel Lower

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Keeping it simple this week with a technical play on NZD/JPY to play the rising coronavirus fears and global risk-off market behavior.

NZD/JPY Channel Lower

NZD/JPY 1-Hour Forex Chart
NZD/JPY 1-Hour Forex Chart

Going with the global risk sentiment flow this week, which is still definitely moving negative despite central banks pulling out the big guns this week to provide liquidity and stimulate the economy. And to play this environment, I’m looking buy Japanese yen (a usual beneficiary of risk aversion environments) against the New Zealand dollar, whose central bank cut interest rates another 75 basis points this week in expectations of both an international and domestic economic slowdown. We’ve also got top tier economic updates from both countries that should keep volatility high later this month, but it’s likely the coronavirus outbreak will continue to be the main driver.

From a price action point of view, the trend is currently favoring NZD/JPY bears as the pair channels lower since Mar. 10, and after topping out just above 66.00. We’ve also got the stochastic indicator almost signalling potentially oversold conditions short-term on today’s earlier bounce, increasing the odds a very short-term top could be here.

With both fundies and price action in favor of NZD/JPY bears, I look to scale into a short position from current levels up to the top of the descending channel. My stop will be one daily ATR from my average entry area to give the trade room to breathe given the big pick up in volatility, and my max target will be the next major psychological level below the recent swing lows for a good short-term potential return-on-risk. Here’s what I’m going to do:

  Daily Commodity Currencies: 12 January, Tuesday

Short half position NZD/JPY at market (63.93), max stop at 66.30 with 0.50% risk, max target at 60.05

Short half position NZD/JPY at 64.95, max stop at 66.30 with 0.50% risk, max target at 60.05

I’m only risking 1.00% of my account on this trade if both positions are triggered and I’ve got max potential return-on-risk of around 2.6:1.

What do you guys think? Are you watching NZD/JPY for a potential short position as well? Let me know in the comments section below!

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