CADJPY swing trade break down, forex trading strategy



Before I started implementing Fundamental Analysis, all of my trades were based only on technical ideas. doing this did not mean i wasn't winning any trades and it does not mean that those doing technical analysis are not profitable at all, they are most of the guys I know are consistently making money by studying only price charts. For me, it wasn't quite enough and kind of made no sense that I could determine the value of a country's currency based on a line on a chart, I'm not saying support and resistance lines don't work, they do but my question was why do they work? there must be an influence behind what price does. I then decided to research what really causes currency prices to move. A lot of people have different viewpoints on this topic, right now I am not trying to change anyone's point of view but I'm here to share what my experience has taught me. In this article, I won't talk much about what moves currency prices, ill save that for the next article.

When I was introduced to fundamental analysis, I thought trading strategies were supposed to be either black or blue, I wanted it to be this or that, I was so lazy that I just wanted a couple of written steps that I could follow each and every day for the rest of my life hoping to become profitable. I am grateful that I got to know sooner that it doesn't work that way and it never has. For it to work I had to put in the required work, and because I did, I am now able to share the real knowledge of trading. When you are introduced to trading high chances are you will fall in love with technical analysis because of its simplicity, and on top of that, you are told that you don't need fundamental analysis and that it wouldn't make a difference if you knew how to implement it. I subscribed to that myth in my earlier days, the truth is that most of the people who are saying this don't really understand how fundamental analysis works, and they probably don't know that 90% of price fluctuations, in the long run, are due to fundamental factors. I won't dive deep into how I use fundamental analysis to have an edge in the marketplace, but before I jump into the CADJPY trade idea, I just want you to keep in mind that, Fundamental analysis gives you the value of an asset or in this case a currency's value, and technical analysis gives you price, and is useful for trade management. When I do my day-to-day trading analysis, both technical analysis and fundamental analysis are equally important, although my directional bias is mostly influenced by Fundamental analysis and my entry points are mostly influenced by technical analysis. After this trade breakdown, you will see exactly how I use both these concepts to have an edge in the financial markets.

Fundamental Breakdown

The concepts that I use mostly when it comes to fundamental analysis are 1) Economic divergence and 2) Event-driven strategy. In this CADJPY trade breakdown, I will talk about economic divergence. This is my first stage, I'm looking for countries that have a clear economic divergence, meaning I'm looking for a currency that is doing well and pairing it with a currency that is performing poorly. Now there are a lot of factors that contribute to the attractiveness or the unattractiveness of a currency, it could be political issues, monetary policy divergences, and many more different data points. In this example, we were looking at monetary policy divergence and interest rates. The Bank of Canada has been raising interest rates since mid-2017, while the BOJ has maintained a policy of keeping rates at or near zero. The difference in interest rates between the two countries has widened, which has made the Canadian dollar more attractive to investors than the Japanese yen.

In addition, economic data from Canada has been consistently strong, while Japan has struggled with deflationary pressures and weak growth. This has further reinforced the policy divergence between the two countries and has influenced the direction of trade. When 2022 began, expectations were that Japan could start to shift from its ultra-loose monetary policy. In the following articles, I will explain in detail how we use monetary policy divergences, inflation data, and interest rate decisions to trade currencies.

The trade setup involves both fundamental and technical analysis. Fundamentally, we analyzed interest rate differentials, economic data, and monetary policy statements to determine the direction of the trade. Technically, we used tools in the ICT library to determine high-probability entry and highly rewarding exit points.

Technical Breakdown





By observing the chart above we see that in the grey-shaded area, the Japanese Yen has been outperforming the Canadian dollar. Now the good thing is that we always have a Fundamental reason for that. The shaded area represents the time when the Japanese Yen was expected to shift from its loose monetary policy, so the market was already pricing in the data ahead of the BOJ's monetary policy decision, as it would positively affect the Yen. When the decision was made and there was no shift in monetary policy as of yet, we knew this was a huge opportunity to sell the Japanese Yen and buy high-yielding currencies, currencies that are still hiking interest rates and tightening their monetary policy. In this case, the Canadian dollar was our best bet. We knew that high chances are the sell side move on the Canadian dollar was fading. Technically, by utilizing tools in the ICT library, we wanted to find an area of value that we normally refer to as a PD array. These include Fair Value Gaps, Order blocks, and many more. In this case, the nearest one was a Fair Value Gap, which is marked on the chart below

As we see The FVG marked on the chart, this was the nearest place we wanted to see the price react to, but we did not just enter blindly, we saw this as a good entry point, we wanted to see if other time frames are agreeing with our trade idea. We wanted to see a market structure shift of some kind to get us in, this is also available in the ICT library, will talk in detail about it in later tutorials. we saw exactly that on the daily chart and we got into the trade In the FVG, we talked about this technique in the article: "Unleashing Trading Success: Combining Inner Circle Trader(ICT) Concepts with Technical and Fundamental Analysis for Maximal Profits and Minimal Tears".

This is where the trade currently is. As you can see, this was a no-brainer trade idea. We will be watching if there are any changes in our current Fundamental outlook. Intraday volatility could be influenced by different sentiment drivers, but as long as those daily sentiment drivers are not strong enough to change the underlying fundamental outlook, we will continue to expect higher prices in the CAPJPY.

Today's GDP data was negative for the Canadian Dollar, we will keep monitoring economic data points to see if there is still a need for us to hold for longer!
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