(Click here for chart)

What do we see?

Well after the Yen strengthened against the USD at the beginning of this month we saw it retrace back to its 50% Fibonacci retracement level, which it failed to break. Another interesting Fibonacci development is that we can currently see over the last couple of weeks the USDJPY’s failure in staying above its 38.2% retracement level (you can see plenty of daily wicks passing through this zone but not too many closes above it).

Add to that the fact that during this congestion period there’s a nice bearish pennant forming.

So what does it all mean? How would I trade this?

Well, for me personally, I’d be looking at opening SHORT positions around the 38.2% retracement mark (around 117.60-5) with stops outside the downward sloping pennant line (plus some breathing space) at 118.15 (giving us an initial ~50 pip stop loss). Otherwise, if the SHORT limit entry is missed I’d be looking to enter SHORT on stops at 116.85 (a break below the upward sloping pennant trend line) my initial stop loss would probably be around 40-50 pips away from entry, but upon it’s breakout I’d quickly move the stop down to the high (+10-15 pips) of the breakout bar.

My target for both entries would be the pole length, being the difference between the 100% Fibonacci retracement point (~121.60) and 0% Fibonacci retracement point (~115.20) on the chart, which gives me a target of 640 pips!

What if I were to get stopped out on the 117.60-5 at 118.15?

If I were to get stopped out I’d stop and reverse my position going LONG with stops back at 117.65 (50 pips). I’d need to be careful here as a pennant formation could very easily turn into a flag and I’d be watching the 50% retracement zone very carefully (~118.50). If we get a successful close above the 50% zone I’d be looking for the USDJPY to hit the 100% Fibonacci retracement on the chart as target – being 121.60.

If the market were to hit my stop loss on my entry stop position I would close all positions and would NOT reverse my position – I’d take the loss on the chin and move on to the next trade.

Please be aware that medium and long-term outlooks may look as though they are going to work in the short-term, however, with the nature of things in this world one event can quite easily unsettle these views/chart formations and throw everything out of whack quickly. Just because I have a long-term view doesn’t mean I keep it for months and months regardless of what is happening. As traders we need to be on our toes. I know my view(s) can easily change in a week or two depending upon price action… but I always hope that it remains for months and months, because then I’d know I’m making money!

Anyway, we’ll see how it goes.

Tags: Currency Analysis, USDJPY

So where to from here? Do we have a falling three candlestick pattern?

We do.

While I personally prefer the falling three candlestick pattern to have a close GREATER than the 50% retracement zone of the breakout candle provided it doesn’t close below the LOW of the breakout candle I still hold the BULLISH candlestick continuation VALID.

Adding weight to the formation is yesterday’s close. As you can see from the daily chart of the USDJPY the close of the third consecutive down day finished RIGHT on what was once the resistance line of the ascending triangle.

This is known among traders as the change of polarity.

The change of what??

The change of polarity works as follows: previous resistance becomes new support, or, previous support becomes new resistance. In our USDJPY chart the “previous resistance” once was the ascending triangle’s flat top (being ~108.90), when price broke UP through this and began falling back down the change of polarity would kick in… i.e. support would now be seen at what was once resistance.

Why this phenomenon exists is anybody’s guess… but it does happen, and has been known to work many times.

Therefore, I’d be expecting the USDJPY to rally today. If it fails to close above 109.54 (the close of the original breakout bar) the pattern is failed. If it happens to travel below the low of the lowest low of the last three days the pattern would also be considered failed (this would be 108.66).

Again, just thinking out aloud.

Tags: Forex Trading, USDJPY

And that’s okay for forex traders, because we have the ability to place entry stop orders outside of the congestion range.

Stop entry order zones around this congestion would see 109.07 as the area to go short (as this is where support lay) and any break below this area will likely see further downside to 108.90 (and if 108.90 breaks expect further movement possibly to 107.40!).

As to the upside I would likely label 109.80 as the resistance zone with any break of this area seeing a potential move to 110.50.

Due to the fact that the USDJPY isn’t now showing any real strong signs of going anywhere I would expect another sideways day today… in anticipation that she forms a falling three bullish continuation pattern.

Tags: USDJPY

The best trend lines are those that are drawn from OBVIOUS peaks and troughs… and I label “obvious” as peaks and troughs that you can see from standing at the opposite end of the room.

Whenever I see a chart that was once extremely bullish and then see that it throw up a bearish reversal candlestick pattern I raise my right finger, bend my elbow and bring my right finger to my chin and moan…

Hmmm.

The first thing I ask is: why?

And I begin by looking at the announcements that were released during the day. Yesterday the announcements that were all released were negative for the USD… Retail Sales came out worse than expected, Core PPI & PPI came out worse than expected… so according to the fundamental side of things the USD should have weakened last night.

Then I’ll compare the USD against the other major currencies. Did the USD weaken?

Well the GBP hardly moved.
The CAD strengthened (but it had a positive announcement released).
The AUD started to strengthen but came back by the end of the day.
The EUR & CHF weakened.

So across the board I can’t state that the announcement really was a factor in the JPY strengthening… mainly because nothing else did (bar the CAD)!

I then move back to the charts to see if there was something I overlooked… and after drawing another channel I discovered that there possibly could have been a more technical reason for why the JPY strengthened.

(Click the chart below:)

As per my previous post, if the USDJPY does close below 109.07 today then I’d expect further downside for the USDJPY… and in the long run if this channel is one of the reasons why then we could see if drop further than 108.90!

Tags: USDJPY

No.

So what do we have?

We have a confirmed breakout, but a shaky one though.

The congestion formed yesterday was a famous bearish reversal candlestick formation known as a hanging man. This formation is considered MORE bearish if the close finishes lower than the open… which is what the USDJPY did.

So what do we do?

“Hanging Man” candlestick formations need confirmation, and confirmation will only be seen after today’s close. The confirmation needed is if today’s close ends up below yesterday’s low (being our perfect 50% retracement zone of 109.07)… if this happens we have confirmation that the USDJPY is likely to reverse… and possibly go back to the base of the breakout at 108.90.

What it does when it hits 108.90 (if it does indeed break south) will likely give us an indication of whether the USDJPY will go back up.

Therefore at this point in time I’m probably more inclined to exit my open USDJPY position and see what happens. If the USDJPY fails to close below 109.07 by the end of today I will try to find a re-entry into the currency and use 109.07 as an initial stop loss zone, or if the USDJPY does move below 109.07 I might try and snipe a few pips to 108.90.

Just thinking out aloud.

Tags: USDJPY

Where to from here?

Well, as most Currency Secrets.com readers know – we always need two consecutive closes above a trend line to CONFIRM a break. So we’re either going to have vehement opposition to this move by seeing the USDJPY falling back below 108.90, sideways congestion (which I love), or further breaks north. This covers ALL possible scenario’s I know, but there are areas we can pinpoint on the USDJPY chart where we can possibly guess what is likely to happen if price gets there.

First, we will grab the 50% zone of the breakout candle. Yesterday’s high is 109.68, yesterday’s low is 108.47, therefore the mid-price = 109.075. If price breaks this area then I’d assume that price will likely close below 108.90.

What if price goes nuts again today?

We need to be careful. There are several points that we need to be mindful of: round numbers, old resistance zones.

Round numbers in the way are: 110.00 (can’t get much rounder than that!).

Old resistance zones: at present there aren’t too many in the way, however, as our chart shows we have an upward trending channel that has had two successful touches on the uppermost trend line. This channel converges around 110.50 (another round number! Coincidence?).

So, in summing, if price retreats below 109.07 then the breakout was false and we’ll more than likely see the USDJPY close below 108.90. If price advances and moves beyond 109.80 then look for possible sticky areas at 110.00 and 110.50. If nothing happens then sit tight we’re likely to congest followed by further upside movement.

That’s just how I see the USDJPY at this point in time.

Tags: USDJPY

• A 61.8% retracement from the rally from January 2005′s LOW to April 2005′s HIGH resulted in a calculation of 104.44 – the USDJPY went as low as 104.24 (20 pips lower) but its LOWEST close was only 104.42 (2 pips lower)
• A 50% retracement from the rally made between May 2005′s LOW to June 2005′s HIGH resulted in a support area of 106.53 – the USDJPY went as low as 106.52 (1 pip lower) but its LOWEST close was only 106.58 (5 pips higher)

Anyway, just some interesting things about Fibonacci levels and the USDJPY.

The hardest aspect I find with Fibonacci retracements is TRADING THEM.

Do we place a buy entry limit order at the 38.2% retracement zone then EXIT at a LOSS once price has closed 5-10 pips beyond it?

Do we then place another buy entry limit order at the 50% retracement zone then EXIT at a LOSS once price has also closed 5-10 pips beyond it?

Do we then place another buy entry limit order at the 61.8% retracement zone then EXIT at a LOSS once price has closed 5-10 pips beyond it?

Hmm… I don’t think LIMIT entry orders are the way to go with Fibonacci trading… I’d personally WAIT to see if the market confirms the zone exists then enter at MARKET and use the Fibonacci zone as my initial stop loss once price has successfully rebounded from it.

Or what if we enter a BUY entry STOP on the day’s high if the market fails to close 10 pips below a Fibonacci zone? Then use the Fib zone as our stop loss!

So, we identify Fib zones, wait for price to PIERCE the Fib zone then provided the market CLOSES back above the Fib zone we would enter a buy entry stop order at today’s high (the day that pierced the Fib zone). For each successive day that the Fib zone fails to be pierced we will move our buy entry stop to the current day’s high.

Hmmm….

Just thinking out aloud… maybe it can spark some discussion or better expert opinion from those who ACTUALLY TRADE USING Fibonacci retracements.

Tags: Forex Trading, USDJPY

For those familiar with ascending triangles I believe the USDJPY is forming one right now! But remember… ascending triangles need to occur during UP TRENDS, not down trends (or sideways trends)… so, as with every form of analysis we need to identify the trend.

And we identify trend by quantifying it (as any monkey can say “Up” or “Down”).

I quantify trend by using what is commonly known as trend lines, other popular forms that other people use are moving averages, MACD’s, previous highs and previous lows (etc).

I personally don’t like using double or single moving averages to identify trend as they only have two classifications OF trend, namely, up and down… and I know through experience that there are three forms of trend: up, down and sideways. Moving averages fail to identify this third trend UNLESS you use three moving averages such that when fast MA > medium MA > slow MA = UP, or when fast MA < medium MA < slow MA = DOWN, or everything else = SIDEWAYS.

So make sure you have some form of trending analysis that can identify all three forms of trend.

Anyway... moving on...

So, as per the daily chart of the USDJPY I have quantified the current trend of the USDJPY by drawing a channel that encapsulates its current movement (quite nicely too!). All that I need ask myself is: what is the slope of the channel? Is it sloping up (thereby hinting to an UP TREND) or sloping down (thereby hinting to a DOWN TREND) or am I uncertain (thereby hinting to NO or a SIDEWAYS trend)?

I should be able to tell the trend of the channel within A SECOND, if I ever stutter or stammer in identifying the trend then I know that I’m forcing my belief on what the trend should be instead of what is… and this has led to many losses.

Don’t kid yourself when identifying the trend.

Now if you’ve seen the chart of the USDJPY you’ll see that the slope of the channel is UP (anyone want to disagree??), therefore, as per the rules of identifying ascending triangles we know that our analysis has received the green flag as ascending triangles must be identified at the TOP of moves… and we’re currently at the TOP of our upward trending channel.

But what is an ascending triangle formation?

Okay, maybe I’ve moved too fast for some of you… here’s what comprises of an ascending triangle formation:

• An ascending triangle formation must have a FLAT resistance line with at least two touches
• The troughs formed between the resistance line touches must be higher than the previous trough

You can identify what an ascending triangle looks like by viewing the RED lines in our daily chart of the USDJPY.

Easy to identify isn’t it… and you should easily be able to see ascending triangle formations… if you force it – it’s likely not there.

Ok, now how do we trade an ascending triangle formation?

Well you tell me?

Ascending triangle formations are BULLISH formations, therefore we have the view that the USDJPY will increase in price (i.e. the USD will strengthen against the JPY), especially once it breaks the FLAT resistance line.

So what orders should we place above the FLAT resistance line?

A BUY entry stop order. Good.

Should we place it 10 pips above the resistance line?

Let’s first have a look at where the resistance point sits…

~108.90…

10 pips above this point will see our entry stop order at 109.00…

Eeeek! … A round number.

If you’ve been a regular Currency Secrets reader you’ll know that round numbers can be support or resistance areas themselves… even though they may never have been support or resistance zones in the past!

So what should we do?

Well, this is where I tell you what I would personally do, but then tell you that I’m a risk-seeking monkey and those of you who are more risk-averse and civilized should close your eyes.

Okay, are you sure you really want to know what I’d do? If you don’t then please look away.

Okay… this is what I’d do…

*whisper* I’d buy now! *whisper*

What????

Are you crazy??

Hey I told you not to look!

Are you mad??

Well… yes, but that has nothing to do with this strategy.

I’ll talk about more about it to my subscribers (see at the end of this post for details)… but for the uninformed few I’d buy be buying the USDJPY (subscribe and you’ll know why).

Okay, now that’s what I would personally do… for those that are less risk-seeking than myself you can now open your eyes.

Possible strategies I’d be looking at if I were risk-averse, would be:

• Placing a BUY entry stop at 109.10 – however, do be aware that the USDJPY has been known to wick people in and out, therefore, because it’s the USDJPY we’re trading I would probably do the other, which would be…
• WAIT for a CLOSE above 109.00 and BUY at market

Now… entry is only a small portion of profitably trading (any monkey can get in)… where do we place our stops?

Even though I’m a crazy risk-seeking monkey I must admit – the best place to enter your initial stop loss for ascending triangle formations is below the upward trending trend line… in this case it would be around 106.50… this is a 250 pip stop!!!

Eeeek!

What else can we use?

Well, other LESS technical zones could be a CLOSE BACK BELOW the FLAT resistance line, OR a break below 107.70 (this represents 50% of the run from 106.50 to 108.90).

Is this trade even worth it then (with such large stops)?

The great thing about ascending triangle formations is that there are targets traders can use from this formation. The way to calculate an ascending triangle target is by subtracting the FLAT resistance point from the first trough point. In this case the flat resistance line is at 108.90 and the first trough low was formed at 104.20 giving us a potential target of 470 pips from it’s breakout of 108.90!!

If our risk is 250 pips and our reward is 470 pips is it worth it (RR ratio = 1.88)?

Only you can answer that… but I know it’s worth it for me (but that’s because I’ll use 107.70 as my intial stop loss and therefore risk ~130 pips improving my RR to 3.61).

SO… what have you learnt today?

Hopefully this post has educated you on…

• How to identify trends
• How to identify ascending triangles
• How to enter ascending triangles
• Where to place you initial stop loss
• How to calculate potential targets

I think that just about wraps it up. All we need do now is check the fundamentals to make sure that if we do successfully enter into the USDJPY as per the ascending triangle method that there is no fundamental shift against us.

If you would like to read more about why I’m such a crazy horse then you’ll want to register and keep your eyes peeled for my email that will provide you with a password to access my next post (unfortunately it’s too valuable to reveal to everyone and I’ll be protecting it). Registration is FREE and you can easily unsubscribe at any time… just go to our Currency Secrets home page and enter your name and email address in the form on the right.

Tags: Forex Trading, USDJPY

The reason I do this is that it helps to know which currency to open a position in if a negative or positive economic report is released by the USD, and to open a position that would best take advantage of the strong/weak USD economic report.

As an example, if the AUD has decreased 10% against the USD over the last 3 months, and the EUR has decreased 15% against the USD then if the USD were to release a negative report it could safely be assumed that the AUD will likely rally further than the USD as it hasn’t depreciated as much as the EUR.

Of course this is not always the case and here are some things to be mindful of:

• Does the economic report influence JUST the USD or are there other repercussions against the currency you are considering to trade?
• Does the currency you are considering to trade have any economic releases soon?
• What does the chart say?

There are many ways to gauge which currencies are the strongest/weakest against the USD. Here are some methods that I’ve used:

• Rate of change of the CLOSE over the last 20 trading days (or 60 trading days)
• Rate of change of a MOVING AVERAGE of the CLOSES over the last 20 trading days (or 60 trading days)
• Using channel lines

The method that I prefer is the rate of change of the moving averages coupled with the channel lines. I plot a 20-day moving average and then obtain the rate of change of this moving average over the last 20 days and 60 days. I then just compare the raw figures of these stats to see which currency has the highest number and which currency has the lowest number.

Once I have the two currencies that are the strongest and the weakest against the USD I then plot their charts to determine where resistance and support lay, as these technical zones override any arbitrary rate of change figure.

Here is a table showing these stats (note that the USD is the BASE currency for each currency cross – makes it easier to identify):

CURRENCY >> ROC(SMA(20),20) % >> ROC(SMA(60), 60) %
AUDUSD (2.07) (0.67)
CADUSD (0.99) (0.84)
CHFUSD (3.19) (2.54)
EURUSD (3.36) (2.65)
GBPUSD (3.64) (1.13)
JPYUSD (1.35) (2.53)

As you can see from the above table ALL currencies have weakened against the USD over the last 20 and 60 days (according to their moving averages). The strongest currency over the last 20 days against the USD has been the CAD, over the last 60 days it has been the AUD. The weakest currency over the last 20 days against the USD has been the GBP, whereas over the last 60 days it has been the EUR.

Tags: AUD USD, EUR USD, Forex Trading, GBP USD, USD CAD, USDCHF, USDJPY

Unfortunately the USDJPY broke the resistance zone as indicated, but failed to complete the remainder of the ascending triangle pattern.

However, I do want you to notice one thing: notice after the initial resistance line break the USDJPY fell and rested upon the upward trending trend line and then bounced. This gives weight on where you can safely place your initial stop loss for the BUY STOP entry order above the resistance line.

I still use a 15-20 pip initial stop loss from the resistance line, especially if the resistance line has had 3 or more touches in the past (which the USDJPY did) – because the break SHOULD be relevant (in fact any trend line that has 3 or more touches is important… with the trend line having the most touches being the more significant when broken).

Tags: Forex Trading, USDJPY

If you’ve never seen what an ascending triangle looks like or know how to trade one effectively then you’re in for a treat: I’m going to show you.

An ascending triangle is a triangle that has a FLAT trend line with an accompanying upward trending trend line connecting the troughs made from each retracement off of the FLAT trend line. You can easily see this by looking at our chart of the USDJPY.

As a general rule I always prefer ascnending triangles to occur during up rallies. In other words, prior to the start of the ascending triangle formation was the USDJPY trending up – even if only in the short-term (obviously the longer the up move the better the chances of having a successful breakout). If we look at a daily chart we notice that over the last couple of weeks the USDJPY has been upward trending.

Why do you do this?

I think it has just been something that I’ve observed over successful and unsuccessful trades throughout the years. I noticed that with the majority of trades that had ascending triangles forming at the base of moves it wasn’t as successful as the ones that traded in the direction of the trend.

Ok, so how do you effectively trade this?

Well you tell me?

If you have a view that the USDJPY is going to break the FLAT trend line (which is what happens with ascending triangles): what point(s) on the chart are best for BUYING and for placing stop losses?

Think… look at the chart again if need be.

Okay, an obvious point is placing a BUY STOP entry order above the flat trend line… good.

Where would the stop for this position go?

Back below the flat trend line?

Below the upward trending trend line that touches all the troughs?

This is a tough one.

If you want safety you would maximize your stop by placing it below the upward trending trend line, however, being the risky nut that I am I prefer placing it 15-20 pips below the flat trend line – I HATE it when the currency fakes an ascending triangle break and I usually render the pattern useless if it happens to come back inside the triangle after breaking it successfully… but that’s just me.

Where’s another possible entry zone?

What if the USDJPY travelled back down to that upward trending trend line?

It’s touched it about 5 times, surely if it touched it again it would likely bounce??… It’s touched it and bounced 5 times… why not again? Is there a law that says that trend lines can only be touched 5 times. No… of course not.

So why not place a BUY LIMIT order on or 5 pips above this upward trending trend line (you might need to amend it once every hour as the trend line increases in price) and attach a stop loss order below the last trough (or last successful bounce off of that trend line).

Why so far away?

In my experience I’ve found that the market can whip those who are too tight with their stops in trades like these and will frequently move below the upward trending trend line, but then rally back above it so that it FAILS to break the upward trending trend line and thereby keep it (and the overall pattern) intact.

So be careful of whips if you place BUY LIMIT entry orders around this zone.

What target should I aim for?

As with the flag ascending triangles provide an *indication* of where price is *likely* to go.

The general rule for the length of the breakout is measured between the FLAT trend line’s price TO the first trough formed. In the case of USDJPY the FLAT resistance line is at around 108.30 with the first trough formed around 107.25… meaning that the move is likely to be around 100 pips from 108.30… ending at 109.30.

So there you have it: a street smarts way of trading the ascending triangle. We’ll see how it pans out at the end of the day.

Tags: Forex Trading, USDJPY