Two 50+ pip trades on USD/JPY

In my last post, I identified two key support levels in the USD/JPY based on the long-term chart: the first one was made in April 1995, a multi-decade low of 79.75. The second support level was made recently in October 2010, at 80.24, almost touching the historic low.

Let’s look two trades that unfolded since that post.

I suggested that with the recent support made at 80.24 and it being so close to the historic support, 79.75, this would be a good time to plan trades.

According to classic Technical Analysis, you buy off support levels; if the support gets broken and tests it as a resistance, then you sell from the previous support.

So in line with the logic that we’re trading above key support levels, I looked for buy trades.

The very time of the post was a good entry for a long trade. There were some chart patterns that indicated a bullish momentum.

1. Key trendline was broken and retested before moving up
2. Recent “Double Bottom”
3. Forming of a “Base” bottoming pattern
4. Recent 78.6% Fibonacci bounce
5. Recent 88.6% Fibonacci bounce


Trendline break & retest


Double Bottom pattern


Base pattern


78.6% Fibonacci bounce


88.6% Fibonacci Bounce


At the time of the post, the price was consolidating nicely. The price was making higher lows, and it almost immediately made a new 61.8% Fibonacci bounce:


61.8% Fibonacci bounce just prior to trade entry

So technically, the picture was looking bullish.

As the consolidation was tight, a 25 pip stop would have covered you easily. If you planned your trade around a simple 1:2 risk/reward ratio, you would have earned your 50 pips within hours. The price did actually rocket over 100 pips; that said, I rarely exit a trade after three times my risk, i.e. 75 pips in this case.

More recently, there was a brilliant text book example of a Reverse Head & Shoulders pattern. See the below chart:



The blue lines on the next chart mark an 88.6% Fib Bounce for the Right Shoulder:


88.6% Fibonacci bounce forming Right Shoulder of Reverse Head & Shoulders

My entry was at the consolidation for the Right Shoulder, 25 pip stop. I exited at 50 pips but the trade could have netted over 80 pips. I was content with a 1:2 risk/reward ratio on this trade.

H. Hamid

Yen at historic multi-decade support level

Today's post isn’t a specific trade recommendation, but a key chart observation to help plan future trades.

This is a very interesting time for the USD/JPY coming near a major support level, and the lowest level for over 20 years.

Looking at a chart with monthly bars stretching back to late 1988, USDJPY traded at a low of 79.750 in April 1995. The pair came tantalisingly close to that level in October 2010 trading at a low of 80.241.

For many months, I’ve been reading how the Yen is fundamentally overvalued: Japan has had zero interest rates for over a decade, the country has an aging population, the strong Yen is killing exports and the country’s debts are large compared to other industrialised nations.

I’ve never placed trades based on fundamental plays, because I believe good technical analysis can interpret and time the fundamentals better, as well as account for other factors such as market sentiment.

That said, the current Yen price level now could provide the crucial push for the Yen to weaken, placing it in line with strong fundamental influences.

If you’re involved with international trade, or are a longer term trader, the long-term USD/JPY chart should definitely be of importance to you at this juncture. I would be examining how it reacts to the historic support level - whether it bounces off the support, or whether the price moves through it, retraces and continues to move down to strengthen the Yen - as I believe a move in any direction will be strong.

H. Hamid