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Yen Trade Follow Up!
By Mike Conlon | December 7, 2009
Last week I called out a long trade on USD/JPY, saying:
“Earlier this week the yen reached 15-year highs at 84.80 vs. the US dollar due to the Dubai news on that huge doji candle. Combined with a stochastic crossover near the 20 level could mean a possible trend-reversal, at least in the near-term. If this pair can stay below 89, then I expect strength to continue. Should it breach 89, then the next stop could be the 90.75 level.”
Well Friday was that day for the pair. As USD/JPY rocketed through the 89 level, making a high of– 90.763– before retreating a tad to rest for the next move. As you can see, I pegged that one pretty good– within .013 of the high!
How was I able to get such an accurate prediction?
The answer is Fibonacci Retracement! If you are not familiar with this technical tool, you should become familiar ASAP.
Let’s look at the chart (click here to enlarge):
From the chart above, you can see all of the Fibonacci retracement levels. These numbers are areas of “natural” resistance or support. So when I am looking at a chart, and I believe there is going to be a pullback or in this case, a reversal, I always want to take a look at the Fib retracement levels.
One of the reasons why technical analysis is so compelling is because that at times it becomes a self-fulfilling proposition, so to speak. If a lot of traders are expecting something to happen at a certain level, then chances are something will happen.
In this case, that 90.5 level stands to serve as the “last layer” of support for those who are still short this pair. I can assure you that if I know this, many far more sophisticated traders and investors know this as well. This is why I typically round up or down anywhere from 10-50 pips depending upon how strong of a move I think might occur.
Around these levels you will typically see “stop running”– trades happening above or below the Fib level as traders know that typically other traders in the opposite position will place their stops just above or below that level. That’s why on this daily chart you can see a “wick” on the candle as the pair trades up through the 61.8% level before closing just below it.
This trade made approximately 350 pips in less than a week!
To learn more about how to spot trades such as this one or how to manage your positions once in a trade, be sure to check out our currency trading courses!
To follow these trades real-time, get a free practice account here.
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