With CADJPY trading in a clearly defined range and a fundamental catalyst coming on Tuesday, the pair offers compelling risk/reward set-ups for both range and breakout traders alike.
Tuesday’s Canadian retail sales figures may provide a nice trading opportunity in CADJPY, which has established a very clear trading range over the past four months. Since June, CADJPY has been trading between 92.00 and 97.40, a well-established range that has seen four tests of the bottom of the range and four tests of the top of the range.
There are two ways to trade this scenario: playing the range, and playing a breakout. Playing the range is exactly what it sounds like: as the pair is currently trading at roughly 96.00, range traders will be looking to short the pair using a daily close above 97.40 as a stop, and targeting 92.00. This trade provides a risk/reward ratio of a little better than 2.5 to 1.
Range traders could also wait until price is close to 92.00 before buying. Waiting for longs provides two distinct advantages: 1) CADJPY longs are more in line with the overall trend than the shorts; and 2) a move down towards 92.00 may provide an entry with a tighter stop than shorts from current levels.
Guest Commentary: Range and Breakout Trades for CAD/JPY
The second way to play this scenario is by trading the eventual breakout. All ranges eventually break, and when they do, they often provide very nice trading opportunities. Should CADJPY manage to put in a daily close above 97.40 (perhaps on stronger-than-expected retail sales), a breakout trader would look to go long, using a daily close back below 97.40 as a stop.
Range breaks have a measured move that is equal to the size of the range, which, in this case, is roughly 500 pips. As a result, a CADJPY long trade would target new highs above 101.00. This strategy requires a bit more patience, but usually provides a better risk/reward ratio.
CADJPY offers an opportunity for both range and breakout traders this week, and because of that, it should be on everyone’s radar.
By Liam McMahon, Currency Strategist, GlobalFxClub.com