Is The USDJPY Setting Up for a Short Entry?

FX:USDJPY   U.S. Dollar / Japanese Yen
The USDJPY handed out very good profit in two bull runs between the end of 2012 and 2015 but has since been difficult to trade. Price spent 2017 in consolidation but weakness since November of last year has seen price breakout and now looking interesting for a potential shorting opportunity.

The bear trend in play since the start of the year has covered a fair bit of ground falling circa 800 pips. It is a trend that does pullback but finds resistance at key levels followed by a swift move back in the direction of the bear trend followed by clean breakouts.

Note that the trend started in an area of consolidation and is not an environment you want to look back on in hindsight and wish you had traded. Rather than pick tops and bottoms, which is what many try to do and usually very unsuccessfully, it is far simpler to allow a trend to establish itself first and then find a high-probability entry point into the established trend. This is a very good example.

The most recent pullback retested the key support-turned-resistance level (drawn in red) that had formed the base of the long term consolidation at circa 108. Price then confirmed what we call here an XYZ pattern, which was confirmed when price broke and closed below the Y, but price failed to break and close below the pivot low of the 16th of February on Friday. This fake out created a support zone which now needs to be cleared before placing our first short trade. This still has the potential to setup as a bearish flag which is a excellent chart pattern to suggest a trend continuation.

Once the setup materialises, we would like to see price move towards the next key level of 100. If this level is cleared, remember support and resistance levels are very likely to be broken once price has gathered momentum and is in a trend, then we would like to see price move towards the 2012 low of 75. This will give trend traders ample opportunity to strategically hold and add new positions on either further breakouts or neat pullback.

Contrary to common advice, our advice is to always focus on breakouts first as they are far easier to identify. Pullbacks may offer more profit but require a more in depth understanding of market structure and therefor are more challenging to identify. Trading pullbacks incorrectly can lead to losses that can be easily avoided by waiting for breakouts to confirm a trend continuation.

Patience needed for now until we get the breakout but a currency that does handsomely reward patience as it can trend very well.

Any questions or comments, do not hesitate to leave them below.

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