The USD strength which occurred during the FOMC statement last week had certainly some influence, but it was the Bank of Japan that propelled the thrust to higher elevations. A massive 325 pip daily candle crushed the 110 resistance level and top without looking back a single moment. The volatile and strong break was solidified when Friday’s daily candle closed near the high and had hardly any wick on top, which indicated the lack of any weakness and certainly voided any potential false break.
WILL THE UPTREND FADE?
In the bigger scheme the USDJPY has been in a gigantic uptrend ever since the reversal point at 75.50 3 years ago (end of October 2011). Surely the uptrend had moments where price stalled for lengthy periods – including a 7 month break and consolidation this year. But the uptrend is back into “fashion” and the USDJPY break, pullback and continuation is in full swing. Due to the fact that the strongest weekly candle posted last week there is little danger of the trend fading.
HOW CAN TRADERS CAPITALIZE?
A strong and massive candle with a 325 pip body usually does not have a big retracement before the trend continuation occurs. In this case using a stop loss below the low of the daily candle should be the best spot because placing it lower would needlessly increase risk whereas placing it higher would be placing the stop loss half way a retracement candle.
How far could price retrace? In fact, price could use any of the Fibonacci levels mentioned in the screenshot.
- The 23.6-38.2 Fib levels are known to occur specifically with strong breakouts. Price often does not retrace deep when it is exhibiting strong momentum and the chances of a shallow chart pattern correction before trend continuation are the most likely. Of course, this does not rule out a deep retracement in all cases.
- The 78.6 Fibonacci level would also be a strong confluence level as it equals the previous top and 110 resistance level. Whether such a strong retracement could occur amidst the strong bullish momentum remains a low probability for the moment.
- In fact, I think this trade setup is ideal for splitting the usual risk of a trade into 2, 3, 4, or even parts and splitting the entry levels among the various Fib levels.
WHAT ARE THE TARGETS & TRAILS?
The 2 main take profit levels for the moment are the -27.2 and the -61.8 Fibonacci targets at 114 and 115.30. Here too a split among entries which are aiming at various targets could be the ideal trade management plan.
Once price breaks above the current top at 113 I would be OK with moving the stop loss (trail stop) below the daily candle lows, if the daily candle is bullish and bigger than 100 pips. This helps me avoid moving the trail stop loss below a small daily candle with little importance and keeps the trade from harm’s way and an early exit.
Are you interested in trading the USDJPY? What do you think is the best trade management plan (entry, trail, exit) for this pair?
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