USD/JPY Fake-out or Break-out????

Hey everyone, this is Nathan with a bit of Market Analysis for you swing traders.

If you follow the USD at all, you know that over the past 3 years it has been a LOT of downhill. One of the best USD pairs to trade because of its tiny spread and tendency to make nice moves is the USD/JPY. The USD/JPY has been moving choppily downhill for about the past three years. The pair made its 2011 high in the first week of April with a run of bullish candles following a massive 300 pip daily bar on the 17th of March. If one had entered a long position on the close of that bar and held it until the first complete bearish bar on the daily it would be a 600 pip gain.

Well, on the tenth of May, we saw the best bullish bar since that high. That bar was followed by a few baby bulls and some bearish bars with long tails. Looking at the formation as of yesterday, I thought this is looking like a long set-up if it were just to have one good bullish candle–and today, it looks like we have that candle! The question is: fake-out or break-out?? How do you know whether this will be a 500+ pip gain or a major loser?

I am going to show you the chart and then talk about a few things after:

(CLICK TO VIEW IN FULL SIZE)

Okay. So I am pretty convinced that the pair is going to move up quite a bit this week, but there is still no way I am gonna take this trade without some confirmation. First, you MUST wait until the daily candle closes. It could just turn into a tail and this whole thing means nothing, however it could grow into a massive candle and be a great signal for a long-term winner.

If the day closes with a good candle (I am talking one that is at least 1 hundred pips of blue), you should then wait for a 4hr signal tomorrow (all I mean is a bullish candle with not too much tail on the top of the candle). If a nice signal forms in the morning tomorrow, it will be enough confirmation for me that this pair is starting another mini uptrend and I will be looking to make 400 pips with less than 100 pip stop-loss (that’s 4/1 reward to risk ratio!)

So REMEMBER, keep your eye on the USD/JPY first thing in the morning. Determining whether this is a fake-out or a break-out can mean some serious cash in your pocket!!

As of now, I am saying break-out.

What do you think?? Am I crazy?

Leave a comment and let me know what you think about this trade’s potential!

Follow me on twitter to see whether I take the trade tomorrow!

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  • Anonymous

    Yeah, I see what you’re saying. It’s always dangerous when you need to give a pair a lot of room to make a move, nothing makes a trader more nervous than being down 50 or 60 pips hoping that it’s going to turn around like his analysis suggests.

  • One could also place a tighter stop, at 79.5 or so, if going long. That would have much higher probability of being stopped out, so another long trade on the next breakout could be necessary….

  • Anonymous

    Yeah, I hear you. I am hoping that it starts to rise sooner than later though because that means money for me 🙂

  • Yohay

     I believe that Dollar/yen will rise in the long term, as the Japanese economy needs it badly in its current sad situation. 

  • Anonymous

    Hey Mike, thanks for the comment. You are right, that certainly puts you in a tough position, especially when you are trying to keep a good risk/reward ratio. The answer in this case may be to take a smaller trade size than usual and add once you are in the positive. What do you think?

  • Hi Nathan,
    I also think that the USD-JPY could turn strongly bullish on a daily chart. However, the problem on this time frame are possible stops ( going either long or short). The price retraced to the middle of the up swing, so the stop should be at the all time low, for a buy, or 85.50 for a sell. Tough proposition.