Article summary: Our Breakout2 and Momentum2 systems have done well selling the USD and JPY post-ECB and BOJ decisions, but we’ll be careful here—risk on trades is big ahead of tomorrow’s NFPs report.

It has been an incredibly eventful day across forex markets, and our trend-following and volatility-based trading strategies have bought aggressively into Euro strength while selling Japanese Yen weakness. How has our trading bias changed?

On Monday we wrote that we were broadly in favor of using our trend-following Momentum2 system across Euro, US Dollar, and Japanese Yen currency pairs. On the EURUSD and EURJPY in particular we liked Breakout2 trades. The systems had a slow start to the week until they began selling aggressively into Euro and British Pound weakness against the US Dollar and Japanese Yen.

Those JPY and USD trades were stopped out in a hurry following the Bank of Japan and ECB decisions, and in fact the same strategies have now flipped direction and are heavily long the EUR and GBP versus the Dollar and Yen. Getting stopped out of trades is never a pleasurable experience, but we obviously use stops for a reason; they saved us from a great deal in trading losses.

Below is a screenshot of the strategy dashboard available on DailyFX PLUS:

We very rarely change strategy trading biases on a mid-week basis—market conditions don’t often change dramatically intra-week and shifting direction leaves us vulnerable to getting chopped out.

Yet it’s surprising to note that our FX options-based “Volatility Percentiles” have actually fallen despite sharp price moves, and we fear that chasing JPY weakness here is ill-advised. The clear risk leaves us very cautious of fresh Breakout2 trades across USD and JPY pairs. For Momentum2 the risk is that the next price swing would actually lead it to flip direction once again.

And if today was any indication, tomorrow’s critical US Nonfarm Payrolls could likewise spike major price moves across the board. What do we do?

One of the benefits of automating strategies on the Trading Station Desktop is that we can manually turn off the systems and manage any positions manually.

Given that we’re now doubly-long EURUSD, EURJPY, and GBPUSD, we’ll take advantage of the fact that we’re floating gains and take partial profits. On the remainder of the positions we’ll trail stops.

Euro/US Dollar: The pair’s break above previous congestion resistance near $1.2875 and 60-min close above a key 61.8% Fibonacci retracement at $1.2935 leaves short-term targets at $1.3050. But we won’t let the position get away from us—trail stops below previously critical resistance-turned-support at $1.2875.

Chart source: FXCM’s Trading Station Desktop, Prepared by David Rodriguez

Euro/Japanese Yen: Given that Momentum2 put us into our EURJPY long at ¥121.38, we have a fair deal of flexibility with using unrealized gains as capital cushion. That said, Breakout2 doubled exposure at ¥124.39, giving us an average price of ¥122.89—not as great. I’ve already taken partial profits on the Momentum2 position, leaving me at approximately 1.5 times normal trade size. For the remainder I’ll look to manually trail stops below previous reaction highs at 123.45 and 122.70.

Chart source: FXCM’s Trading Station Desktop, Prepared by David Rodriguez

British Pound/US Dollar: Momentum2 put us into a long at $1.5195, while Breakout2 bought at $1.5216. Volatility was too low on Monday for me to automate Breakout2 on my account, so I’m only working with a normal-sized position. Key reaction levels are congestion at $1.5200 and $1.5150. A break above $1.5250 sees no major resistance until $1.5315 and $1.5500—reward/risk seems good on the trade. That said, I’ll trail the stop below $1.5150.

Chart source: FXCM’s Trading Station Desktop, Prepared by David Rodriguez

It was previously looking like a lackluster week for our trading strategies, but dramatic post-ECB and BOJ moves leave us floating respectable gains. It will be critical to manage exposure and risk ahead of tomorrow’s Nonfarm Payrolls release, however—no need to put ourselves at needlessly large risk of post-event losses on any reversals.

Automate the Momentum2 trading system via the FXCM Apps store

View Previous Articles on Automating DailyFX and DailyFX PLUS Strategies

Auto trade the trend reversal-trading Breakout2system via our previous article and webinar recording.

Trade with strong trends via our Momentum1 Trading System and view an archived webinar.

Automate the DailyFX Breakouts on Volatility System article, webinar.

Take advantage of forex intraday seasonality via our DailyFX AsiaRSI Trading system, view archived webinar.

Why do most forex traders lose? How can we avoid common mistakes?

— Written by David Rodriguez, Quantitative Strategist for DailyFX.com

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