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After some profit taking last week, the uptrend in the USDJPY which has been visible since late 2012 has resumed, prompted by the latest news out of Japan announcing that the Chairman of the Bank of Japan Masaaki Shirakawa is to step down on March 19, three weeks before the official expiration of his tenure. It is expected that this move, coupled with the swearing in of a new BoJ Chairman as well as two new deputies on the same day, will further add some impetus to Prime Minister Abe’s economic policies towards further easing.
With this fundamental trigger in the bullish direction signaling an end to profit taking, what methods could the trader have used to effect a technical trade in the bullish direction? The following article provided to us from the www.investing.co.uk team provides some clues as to how this could have been done.
We see from the chart below that a bullish pennant as well as a symmetrical triangle has formed on the USDJPY hourly chart. The symmetrical triangle has a bias which could at one time be bullish and at other times be bearish. In this case, it would have a bullish bias, giving a direction to the price according to the market sentiment which is decidedly bullish.
At the same time, a bullish pennant, which is a continuation pattern, formed on the chart. The two chart patterns were identified by the Autochartist MT plug-in.
We clearly see the pennant traced out in purple, and the symmetrical triangle traced in green. In this setup, it is preferable to use the pennant since it is a confirmed bullish continuation pattern, unlike the symmetrical triangle whose bias is determined by the market sentiment.
With these two chart pattern technical triggers, the trader could enter long around 92.01.
In the second example, we have used a different technical analytical method, which is the Fibonacci retracement method. This method is based on the combination of the Fibonacci retracement tool with an oscillator and/or candlestick pattern, with the aim of the trade being to pin point at which Fibonacci level the profit-taking induced retracement would end and a bullish re-entry by market participants would occur. We see this at the 38.2 Fibo level where the Stochs cross occurred at 20 (oversold level) and a bullish harami formed at the same time. Combining these technical triggers would put our re-entry price at 91.98, which is only two pips below the entry price derived from the first example.
Look at the setup on the chart. This is the same USDJPY hourly chart, showing the application of the Fibo retracement tool from the swing low to the swing high, the retracement which was caused by profit taking (and which completed the pennant in the first example), as well as the bullish harami that formed on the 38.2 Fibonacci retracement level. The combination of at least three technical confirmations strengthened this signal to buy at 91.98. In practice, it is safer to buy above the physiological resistance of 92.00.
In the forex market, the key trading dictum is “trigger fundamentally, enter technically”. This trade on the USDJPY is a clear example of how this is done, using a fundamental trigger to assess market bias and finally nailing the trade with a variety of technical setups.