One of the major weaknesses of trading key macro fundamentals is that markets can move violently in one direction in a seemingly ‘irrational’ way. So, if you have a bias for a currency or instrument to trade it makes sense to only do so when you can clearly align the technicals to manage your risk.

How to use technicals to manage risk

There are many different ways to do this, but this article will outline a recent CADJPY trade and how small bite areas were used to manage the risk.

By minimising, but most importantly by limiting risk, there was a high degree of confidence that can be grown in your trading. For a full rundown on what was expected see the focus of the week here where it was outlined that, if the headline comes in above 6.9% y/y, core above 0.8%, and the trimmed mean above 5.2% then the CAD is likely to strengthen out of the print, but then growth worries could cause that surge higher to be faded. In this case, depending on the latest BoJ activity, a CADJPY short may still be worth considering.

So, in the event, the CADJPY pair made sense to short. The CAD CPI was high but not high enough to change the outlook for the BoC. The US retail sales print was good which weakened the JPY but again not enough to change the outlook. As the CADJPY rise, it made fundamental sense to take a CADJPY short. But, here was the question, how should you manage risk?

As the data was released there were three areas that stood out:

  • Area 1: A false break of this symmetrical triangle structure would provide a good area to short from. This was the trade taken and profit was taken at the 105 level.
  • Area 2: If price had moved higher then the R1 pivot point could have been used to manage risk with a relatively small stop.
  • Area 3: The best area would have been if price had moved all the way back up to the R2 pivot area. Stops would then have been placed above the 107.50 level.

So, the lesson is, there were 3 places to define and limit risk without having to use a 250-point plus stop. Take small bites.