New Candlestick Analysis Results in Breakout Entry
The USDJPY has continued its descent from its current 2012 highs residing at 84.17 created on March 15th. Price has moved as much as 489 pips lower, to 80.28 yesterday’s low. As momentum builds to the down side, traders can look to price action clues to help define market direction and entry points. One unique way to trade price action is through candlestick analysis.
Looking closer at yesterday’s closing candle, we have completed a traditional candle pattern known as the Falling Three Methods. This pattern is developed by viewing five candlesticks and suggests a continuation of our trend with the creation of a fresh lower low. Depicted below, we can see the pattern completed on our recent drop lower after three days of consolidation. If this pattern signals the reinstitution of our bearish bias, traders will look to move in on their charts and look to find new selling opportunities on the USDJPY.
Zooming the graph in to our current days price action, we can also use candle analysis to see the USDJPY developing an inside bar. An Inside bar is created when the current days price does not exceed either the previous day’s high or low.Breakout traders look for this charting setup to apply entry orders above the previous day’s high and lows. Currently these levels stand ata daily high of .8099 and a low of .8028 from Mondays trading.
ATR can again be used to determine our profit targets. A suggested value is 20% of the daily ATR. Currently daily ATR resides at 85 pips. 20% of this value would suggest a minimum target of 17 pips on the USDJPY.
My preference is to sell a breakout under support in the direction of our daily trend. Limits should look for a minimum 17 pips profit, with stops set above new resistance keeping a 1:1 Risk / Reward ratio.
Alternative scenarios include prices remaining “inside” prior to a breakout.
---Written by Walker England, Trading Instructor
To contact Walker, email WEngland@FXCM.com . Follow me on Twitter at @WEnglandFX.
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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.