I am a big, big trend trader, and religiously watch and follow the trends. But I am not blind to watching what's going on in the markets either, and I've written about currencies professionally for years.
Right now, the yen is flashing warning signs. The trend might be a stronger yen, but the yen is bumping up against a ceiling. Apparently it "wants" to go higher. Still, due to the ongoing threat of an intervention by the Bank of Japan, the yen isn't going higher.
If you are trading the yen and holding positions overnight, be aware of the possible intervention that can happen at any time.
In fact, I think the good trade here is to actually go short the yen, despite trend indicators leaning to being long the yen. The reason for this is I do believe the Bank of Japan will intervene again. When that happens, the yen will probably move 300-400 pips on the intervention.
This does not mean sell yen right now, and we need to be very aware of exactly how much we should risk on this trade.
Where to sell yen on an Intervention Trade?
Just looking at the chart data, prices below the 76.30 area is a good entry point. The Japanese yen did get to a low of 75.60 before the interventions began in late October. However, if the Bank of Japan is to retain credibility, it may intervene again at 76.00 level.
So you want to buy below 76.30 in the USDJPY on an intervention trade.
Remember, when looking at a USDJPY chart, down means a stronger yen, and up means a weaker yen. It's a quirk of the market standards - the chart shows U.S. dollars priced in Japanese yen, so right now, 77 yen buys 1 U.S. dollar.
click to enlarge
So, if you're making a play the Yen will get weaker, you need to buy the USDJPY. You can also sell Japanese yen futures to get short Japanese yen. If you use futures, the corresponding level is 1.3120. Sell Japanese yen futures above 1.3120 if you are playing the intervention.
Still, it's hard to justify putting on this trade unless you get a good price for it. Do not enter the trade today. Wait for a good price.
Current USDJPY Volatility does not Reflect Risk
Many trend traders calculate risk using the Average True Range of the market over a 1 or two month timeframe. However, I will argue recent daily ranges do not reflect the risk in this trade.
The range has been artificially compressed in the yen, and is not an accurate gauge of the risk.
The range of the yen is extremely low. In fact, the average daily range of the market is the lowest it's been in the last 7 years for which I have daily data.
The ranges are artificially suppressed by the threat of the Bank of Japan unleashing a $50bn worth of yen on the market during some random overnight session.
The market is so static, I have partially overrode my trend trading system and reduced the risk allocation to the yen. This is something I do only very rarely, and only for reducing risk. I'd rather miss a bit of a trade than be exposed to an account destroying black swan.
I highly recommend using a longer term range of 60 ticks to judge the size of your trade.
Some people might scoff at using the daily range instead of volatility. I've done a long term study of volatility. Unless you are trading options or need extremely specific volatility measures such as Garman-Klass volatility, you should use the daily range because it's so simple to calculate.
When to get out during an intervention?
The ranges of the last two interventions give us an indication on when to get out during an intervention. I suggest looking at 250 pips of gains on this trade, which would be 78.80 level in the USDJPY.
This is a bit below the maximum levels possible. The interventions don't last long enough to think about when to get out. Exit orders need to be in place as soon as the trade is executed.
So if you want to play a "possible" Bank of Japan intervention:
- Wait to sell the yen until a better level, 76.30 or better
- Watch the risk - current ranges don't give an accurate indication of risk
- Get out after 250-300 pips
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
