Yesterday was another quiet day in the FX market with even the most active major pairs posting small daily candles. At the moment, we don’t have many major market moving events like we had last week with the BOE meeting and the US nonfarm payrolls (although the RBNZ meeting this evening might cause some volatility). Nevertheless, we saw some Yen strength yesterday with the USD/JPY losing a grip on the recent bounce it had accomplished. Yesterday morning early I wrote of the possibility of more Yen strength and entered a short trade on the USD/JPY. This has been paying off so far, but we will see what happens in the markets today. Let’s start our analysis with the USD/JPY:

USD/JPY Daily Chart

As you can see the pair printed a bearish day yesterday, and Monday’s low has been breached by yesterday’s price action. Although the market was quiet yesterday, with limited movement, the red candle is still encouraging to the bears. I wrote in yesterday’s trading plan that I like the short side on the USD/JPY, with one of my reasons being the extreme retail sentiment. Then there were 3 long traders for every short trader. At the moment it is 3.39 long traders for every short trader. So it is more extreme than a day ago, giving an even stronger bearish signal. We often see retail traders loading into long positions when price declines, as we have seen yesterday. Let’s look at an hourly chart of the pair:

USD/JPY Hourly Chart

Here is one way to trade the pair today. You can see that the red ellipse could be a confluence zone of the 20 EMA and the 4-hour 20 EMA (the blue and green exponential moving averages). Perhaps a pullback to these moving averages might offer a good resistance point to sell the pair at. Just remember that it is important to observe how price reacts to certain levels and moving averages. As mentioned previously, structural changes in price sometimes necessitates the alteration of a trading strategy. Like, for example, when we see an unexpected expansion of volatility, perhaps resulting from a fundamental catalyst, we need to be careful when entering a trade. So to place a pending sell limit order on let’s say the 20 EMA on an hourly chart on the USD/JPY might be a good way to play it, but it also has its risks. The advantage of placing a pending limit order like this is that you don’t need to watch the chart all the time. On the other hand, it is sometimes better to first see how price reacts to the zone in which you would like to enter the trade. Some traders prefer to wait for this kind of confirmation. Obviously, they miss many trades, but the ones they take are generally very good trades.

For traders seeking to scalp the USD/JPY, short entries can be taken on a 5-minute chart, looking for pullbacks to the 20 EMA. Look at the example below:

USD/JPY 5 Minute Chart

Notice that these examples of short entries are preceded by impulsive selling. The entry is taken off of weak bounces or shallow corrections. Please note that scalping might be difficult and risky for inexperienced traders. Let’s look at some other major pairs.

GBP/USD

GBP/USD Daily Chart

My bias remains bearish on Cable. Yesterday the pair declined for the fifth day in a row. Perhaps traders can wait for bounces to sell. Many times pullbacks to the 20 EMA on a daily chart don’t occur so often, but entries may be taken on smaller time frames in these cases. A trader should gauge the volatility of a pair together with many other factors in order to consider which time frame and moving average to take entries on. In certain cases, it may be more advantageous to buy or sell pullbacks to a 20 EMA on a 5-minute chart. Sometimes a move is so forceful and smooth that trading breakouts is more viable than trading pullbacks. Like yesterday on the GER30 when we had a massive 180 point move without a single pullback to the 20 EMA on a 5-minute chart.

Retail sentiment on the GBP/USD is still extreme with more than two long traders for everyone short. This points to a further decline in the exchange rate. The BOE are ready to ease further if it were necessary, and this might persuade investors to keep selling the pound.

USD/CHF

USD/CHF Daily Chart

It looks like this pair might have run into some resistance near the 200-day moving average. I like the tweezer double top formed by the last two daily candles. Gauging by the wicks of the last three trading days, it looks like the pair might have difficulty getting past the 200-day moving average. Perhaps this is a splendid opportunity to play the range with a sell entry between the current price and the 200-day moving average. I would enter on the 200 MVA with an 80 pip stop loss and a target of 160 pips.

Events to watch today:

The most important event today is probably the RBNZ’s interest rate decision with the accompanying statements and a speech by Mr. Wheeler the RBNZ governor. Besides this, we have US crude oil inventories at 14:30 GMT. People trading the Canadian dollar should keep an eye on this event as the CAD is highly correlated with oil prices.

That’s all for today, good luck trading out there!