Trading the Yen and Nikkei Ahead of BOJ Decision

Trading the Yen and Nikkei Ahead of BOJ Decision

How do you trade the Nikkei 225 stock exchange or the Yen forex pairs versus the euro, Aussie, pound, and US dollar during the volatile period just before a rate announcement? The BOJ is expected to leave rates unchanged tomorrow, but traders have a variety of up and down moves in different time frames to take advantage of. 

Japanese lanterns |
Japanese lanterns | Getty Images Credit: robertcicchetti

Japan's central bank is meeting October 31 to November 1 to decide whether to adjust interest rates. This caused a big drop on Friday in both the Nikkei and the USD/JPY forex pair, with similar sentiment versus the euro, pound, and Aussie. The drop came after a steady uptrend for more than a week. Although the BOJ is expected to leave rates unchanged, this hasn't stopped traders from participating actively in all markets related to Japan's currency and stock market. 

Since Nadex is a regulated exchange and doesn't offer trade recommendations, we'll focus here on some key features of the charts that you should look at before making your own trading decisions. You can trade moves that take place over several days, several hours, or even quick moves (scalps) that might have you in and out of the trade in just a minute or two. 

No matter what time frame you like, it's important to know the larger context, i.e. the bigger, dominant trend that is taking place over the longer term. A sharp downward move lasting a couple hours means one thing when it happens as an extension of a week-long downtrend. It means quite another when it happens as an interruption to a longer-term rally. 

For over a week, the USD/JPY spot exchange rate has been in a straight uptrend, with some selloffs along the way. The selloff on Friday was the largest, but it landed exactly on the trendline (red) that marks the lows of the trend from October 19. It's likely no coincidence that it stopped right there—plenty of traders probably drew the same line and had buy orders resting around the 104.60 level. The rally that followed seems to support this. 

It's up to each trader to decide whether that means the market will now drop again to retest that trendline or continue the larger uptrend. It may well do one, then the other, or do head-fakes in both directions. That's what markets do. But it helps to narrow your choices to the two most likely moves. 

Traders who use Fibonacci will note that the market did a 38.2% retracement of the up move, but has yet to do a full 61.8% correction. That's not necessarily bearish, but traders may weigh that piece of information against the view that the trend is unequivocally upward. 

There is another significant Fibonacci retracement in the short-term:

On the 5-minute chart of that same USD/JPY spot forex rate, you can see that the market rallied after Friday's drop to the 61.8% level and a little bit beyond. For die-hard Fibonacci users, that 61.8% number is almost magical, corresponding to the golden mean, or the Greek number phi. Again, what it means is a point of debate among chartists. Some would call it a full digestion of the previous move, signaling that it's ready to turn back downward. Others would point out that it has lingered at 38.2%, signaling uncertainty. 

It's your call which it is. Or not. Actually, you don't need to predict a direction for the long term. You just need to be able to take a position with a good risk-to-reward ratio for the short term. If you see a hesitation before a further down move back to that red line, sell it and make sure you have limited risk. If you think it's headed back up once it's done trying to bounce off that red line, take a limited-risk long position and be prepared to ride out some volatility either way. 

In fact, you could do one of the above trades, then the other, maybe even in reverse order. I'll leave you to figure out how. 

Finally, remember that Nadex has five different ways to trade the Japanese economy: four forex pairs (EUR/JPY, AUD/JPY, USD/JPY, and GBP/JPY) and the Nikkei (Japan 225) stock index futures. You might have an interest in a particular economy. Or like me, you may like the British/Japanese pair because they are both island nations known for their poetry. Or you might follow interest rates and therefore know about the Aussie-Japan carry trade that is such a big factor in international banking. 

If you prefer futures to forex, you might prefer the Japan 225, based on the Nikkei index futures. But when you look at the chart, it may look surprisingly familiar: 

The Japanese stock market has been unusually mirroring the movement of the Japanese currency. This doesn't always happen. The US stock market sometimes rallies while the dollar stumbles, for example. But in the Nikkei (J225) chart above you see the same features: a big drop on Friday, a Fibonacci retracement upwards going above the 61.8% level, all within the larger context of a week-long uptrend. 

And all that movement is supposedly because the markets are waiting for a decision that is most likely going to be a non-decision. An "overwhelming majority" of economists surveyed by Bloomberg News expect the BOJ to keep rates the same. So speculating on the news may not work in this instance, since there isn't much news to speculate on. 

But there are chart patterns, and they tell a much more definite story. More and more traders are learning technical analysis and learning that behind the lines and Fibonacci patterns are traders with intentions, with fear and desire and strategy at work. The lines help you understand how and what they are thinking so you can make decisions you feel confident in. 

And I might add, it's easier to feel confident when you are always backed by the power of limited risk. 

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