Hi again Dukascopy Community.

This is my second article in this contest, this time about the Technical Analysis behind Yen’s Strength (based on USDJPY currency pair).

With permission of contest organizers, I decided to record a video. The main reason for me doing this was, that not many of you like reading a lot. Besides, we all know that when you watch something and not only read about the subject, it becomes easier to digest, especially when the work is difficult.

I hope you enjoy this form of video article, as well as the explanation provided with it.

Should you still prefer the text, you can find the full transcript below the video.

Let’s start.

The chart you can see now (below) is weekly chart of USDJPY. This is the basic layout which later on will be complemented with more sophisticated support/resistance lines and potential entry levels.

USDJPY WEEKLY (1)


Main thing I want to point out is that during strong downtrend in which the pair was for last 5 years, corrective moves/waves tend to be inclined at an angle of exact number– in this case 10.3 degrees.

Another interesting thing is that after breaking the black support lines, price came back towards them and tested as a resistance (it happened in 6 out of 8 cases which I show on next chart)

(you may have a question now)

QUESTION: How do you know which place is good to put the support line?

ANSWER: There is no way to know this right away. Best strategy here, is to put that line through major bottom and see if after breaking it price comes back to test it as resistance or in other words, if the local top reaches the resistance line which was put, through earlier bottom.

QUESTION: How should I trade when I already find such lines?

ANSWER: Good question again. Take a look at the next chart (below). There is no 100% profiting strategy. I mentioned earlier that 6 out of 8 cases ended up with price testing ex-support now resistance line. That could have been your SELL entry point (of course if you did not sell already on a break of such support line).

On next chart you will see better what I mean.

USDJPY WEEKLY (2)


I marked with red ellipsis all points of entry on a BREAK of support line. You can see that first 5 of them meet all the requirements for resistance test entry point. Before I will explain them closely pay attention to the right bottom corner of the chart. You can see last year’s pair price fall caused by an earthquake and tsunami.

Interesting enough, that even after printing new all time low on March 14th, price managed to get back above the support line (with “small” help of Bank of Japan) and climb higher to test resistance level. This is another reason why it is safer during downtrend to enter at resistance test point and not on a support break. Couple of reasons:

ú         It is easier to establish an exit point (we see the support that is our goal. In case of entering on a support break, establishing another support that is our TAKE PROFIT level may become difficult)

ú         The R/R ratio is much better than comparing to support-break entry point. This is because the amount of loosing pips is smaller than the amount of potential gain because STOP LOSS is placed after a weekly candle breaks above resistance line AND CLOSES THERE. If we break above but candle closes below, technically there is nothing to be worried about&hellip

Finally, look at today’s price level. Four and five weeks ago we tested the tsunami support line. This only shows that mastering support/resistance lines gives you valuable hints where next top/bottom may be…

QUESTION: OK. You got the entry point but where should we the exit from the position?

ANSWER: This one is always a bit tricky. There are two kinds of exit strategies I’m using. One of them says that I close my trade when price reaches previous low (the one that was made after support break). This also implies that the break of support line must occur because previous bottom is always 10.3 degrees diagonally lower than black support line.

Second option is when price reaches the distance between two lines of recent correction channel, put from entry point downwards.

To show you better what I mean take a closer look at next chart (below).

USDJPY WEEKLY (3)


As on previous chart I marked entry points on break of support level, here I only marked resistance level entry points. To differentiate the arrows I used pink and blue. Pink arrow shows me the distance between channel lines and blue arrow shows me where my potential target/exit point/TAKE PROFIT level should be.

After the video finishes I encourage you to take a while and analyze closer those entry and exit levels.

Before I move on I just wanted to point out that NOT ALWAYS those support lines will go from lowest bottoms. In the middle of the chart you see diagonal golden line. It is exactly the same kind of support line (same angle) but price breaks through it quite fast and there is no resistance test. Later on new set of channels is formed.

THAT IS WHY NOT EACH BOTTOM WOULD FIT OUR REQUIREMENTS OF SUPPORT LINE.

Let’s take a look at another chart. This one will be more complex and so will require more of your attention.

USDJPY WEEKLY (4)


On this chart most important part is PINK DOWNTREND LINE with numbers from 1-4 which signify each point when price touched the line and RED DOWNTREND LINE with numbers from 1-3.

This chart is supposed to show you general situation on USDJPY pair. To make closer analysis take a look at the same chart only a bit zoomed.

USDJPY WEEKLY (5)


This is right bottom part of the earlier chart. Here the most important elements for our potential entry and exit points are:

ú         Blue downtrend channel lines

ú         Green downtrend support lines

ú         Blue circles that I used building channel

ú         Red circles as SELL entry point/TAKE PROFIT level

ú         Green circles as BUY entry points

TRADES

Let me start with blue downtrend channel. It took 2 years to build this channel. First three support points, break and resistance test, then another lower support test and finally March 14th low. All those moments formed the channel that made two entries possible.

a)      First entry based on blue channel and pink downtrend line was at PINK POINT NUMBER 3 where confirmed resistance was formed. SELL order opened here would have two potential TAKE PROFIT levels:

1.       Middle blue line at around 79.97

2.       Lower blue line at around 75.90

STOP LOSS would be placed with the same rule as earlier mentioned: if candle closes above the resistance trend line.

b)      Another possible and quite comfortable entry was the day before Bank of Japan intervention on October 31st. This entry was indicated by two factors:

ú         Green downtrend support line

ú         Blue channel support line

At that point TAKE PROFIT was quite limited.

1.       Middle blue line at 79.40

2.       Pink downtrend line at 79.40

If you want to believe in coincidence be my guest, but to me this BoJ intervention might have something in common with those lines… Of course previous all time low at 76.26 was also a factor. At that time there was also a lot of talk about strong yen hurting Japanese economy etc. etc. and many traders were expecting intervention.

Again, by coincidence or not, we managed to get to exact resistance point and turned back once again.

STOP LOSS was put below green downtrend line.

c)       Another BUY entry was possible on a break of pink downtrend line at around 77.60 – where weekly candle closed.

STOP LOSS in this case was placed below BLACK SUPPORT LINE (same support line that is inclined at an angle of 10.3 degrees)

TAKE PROFIT on this was at middle blue line at around 79.27, second at red resistance line (RED POINT 3) at around 83.70 and last one at upper blue channel line at around 84.78 where is also ex-support now resistance line.

There could have been one more position opened at PINK POINT NUMBER 4. When price reached that level you could have opened SELL trade and expect further downside towards black support line. The problem was that it would mean going against Bank of Japan at very nasty level and with risk greater than possible reward.

That would be all Dukascopy Community!

Hope you enjoyed the material. Should you have any additional questions or just want to share your opinion, feel free to comment and rate.

GOOD LUCK TO ALL!