USDJPY Downtrend Looks for Confirmation at 100 Day Moving Average

By DailyFx | October 05, 2012 AAA

The USDJPY has been on a strong downward move since earlier this year. The trend started from a turnaround at the 84.00 level and became a legitimate downward move as we see lower highs and lower lows below the 100 day moving average since May.

When approaching any trend, we fist want to look for confirmation. When a trend has held for the better part of the year, we find levels the trend does not break and we can then look for set up on a smaller time frame based on those levels. The key level on USDJPY is 78.80 which is the 100 day simple moving average price.

USDJPY_Downtrend_Looks_for_Confirmation_at_100_Day_Moving_Average_body_Picture_3.png, USDJPY Downtrend Looks for Confirmation at 100 Day Moving Average
(Created using FXCM's Marketscope 2.0 charts)

Traders know that attempting to jump in front of a move before it's confirmed can be riskier than it's worth. So what are we to do?

A trend confirmation checklist will help you see if the trade is worth adding to your watch list.

This trend confirmation checklist can apply to many trends you find.

  • Lower lows and lower highs to confirm downtrend (or higher lows and higher highs for an uptrend).
  • Respect to the Moving Average. In this case, the 100 period moving averages has been honored three times since the break and is testing it a 4th time.
  • Heiken-Ashi is used here to average out the candles so momentum is clearly displayed.
  • RSI Resistance on a downtrend as the indicator has stayed below the overbought level of 70 (support is around 40-50 on an uptrend).

For entries on a set up similar to USDJPY, we can walk down to the 4 hour chart to find momentum shifting in the direction of the trend. Using more than one time frame when locating trading set ups can improve your overall probabilities.

Once we're on the 4 hour chart, we'll use the Slow Stochastic Indicator. This is a momentum indicator that shows you when a turn is likely because momentum to one side has been exhausted.

Here is the Checklist on the 4 hour (or any smaller time chart from the original trend identification chart):

  • Load up the Stochastic so that you can identify momentum shifting on the smaller time frame in the direction of the overall trend.
  • Locate the Entry Zone via a price range to know if the trend is continuing.

USDJPY_Downtrend_Looks_for_Confirmation_at_100_Day_Moving_Average_body_Picture_4.png, USDJPY Downtrend Looks for Confirmation at 100 Day Moving Average
(Created using FXCM's Marketscope 2.0 charts)

If the trade set up is confirmed on any trend, we will then look to target twice the number of pips that we're wanting to risk. This is a fundamental but key concept in trading well known as your risk: reward ratio.

In the image above, we want to make sure the downward channel isn't broken by price breaking above the recent swing high. This would invalidate our set up and is no longer worth your time. Also, we're looking for high probability set ups, so we set our stop outside of the falling channel and our target zone within the falling channel.

---Written by Tyler Yell, Trading Instructor

To contact Tyler, email tyell@fxcm.com or follow me on twitter at @ForexYell

To be added to Tyler's e-mail distribution list, send an email with the subject line "Distribution List" to tyell@fxcm.com.

Want to learn more about trading RSI? Take our free RSI training course and learn new ways to trade with this versatile oscillator.Register to start learning your next RSI strategy!

comments powered by Disqus
Related Forex Analysis
  1. GBP/USD upside remains corrective – Commerzbank
    Forex News

    GBP/USD upside remains corrective – Commerzbank

  2. USD/CHF shows recovery attempts, as it bottomed at 0.9340
    Forex News

    USD/CHF shows recovery attempts, as it bottomed at 0.9340

  3. SEB:  More EUR/USD buying seen above 1.2943 - eFXnews
    Forex News

    SEB: More EUR/USD buying seen above 1.2943 - eFXnews

  4. USD/CAD at Risk for Larger Downside Correction on Sticky Canada CPI
    Forex News

    USD/CAD at Risk for Larger Downside Correction on Sticky Canada CPI

  5. What’s the sentiment around the EUR/USD today? – Scotiabank and OCBC Bank
    Forex News

    What’s the sentiment around the EUR/USD today? – Scotiabank and OCBC Bank

Trading Center