If you are a long-horizon macro trader there is a good chance you are short Euro or Yen, or both, like myself.
Indeed, the trend is in place and the stories of US economic outperformance and Central Bank policy divergence are strong in both cases.
Yet USDJPY trend is going strong now for over 2 years and has taken out all but most ambitious price targets. Meanwhile Euro has started to go down from 140 only a few months ago. And with parity being a commonly discussed target, it is still less than half-way there.
Am I telling you to get out of the JPY trade? No. Why give up a good trend? However, I treat this trade with a lot of caution now. I am definitely not adding on any pull-backs and incrementally reducing risk on over-extended USD rallies.
I am not technical trader, so I don’t to rely on trend-supports and corridors to stay in my position. I hate being whipsawed by technicals. So I ask myself, what will I do if there is major correction in USDJPY? The key to answering this question is if I have an opinion on where USDJPY will be say, two year from now or five years from now.
I find that is hard for me to have such such an opinion. JPY trends usually last at least 2-3 years, but even by such standards this one is mature. How will I be able to distinguish a correction from a trend reversal?
Thus “steady as she goes” on JPY, but not a focus of risk. And on a pull-back I am as likely to stop-out as to add. Note that recent price action would have made scaling-in profitable, but it is not a headache I am willing to face.
I have not short-changed myself though, because with Euro I AM willing to add on any pull-backs. The 5yr EUR forward is still above 1.31 as I am writing this. And my opinion is that it is going to be much lower in 5 years given what we currently know.
I am not too worried about corrections, because whatever the price action is, I believe that the economic gravity will pull Euro down eventually. The market will have a hard time persuading me that the trend is over.
An interesting consequence of this distinction is that I have to size EUR position very carefully to balance the following 3 goals:
1. Maximum profit in the event of rapid depreciation.
2. Ability to add on corrections.
3. Ability to hold the position through any imaginable price action.
Some of you might shake your heads – aren’t those goals mutually exclusive? Well, a jackpot like JPY from 80 to 120 is not easy to hit.
But bear in mind that if you are targeting 20-30% currency moves, your position does not have to that big initially. And if you are careful and methodical about pyramiding into a trend, you don’t have to expose yourself to any tight stops.