In a new series of monthly newsletters, we will be commencing the first letter for our K2A delegates. These letters will vary from month to month, from exciting news from the trading floor to top performing delegates, to simply something that is on my mind for the markets and I am happy to share with you all.
This month I will be concentrating on the USDJPY. What I have simple observed is that we are just coming out of a wedge formation (refer to chart 1). What does this mean? In a wedge formation, the market is unclear of which direction that it wants to head, hence it keeps getting tighter and tighter until a point in time it will break. At this break the market tends to break strongly.
So how can I as a trader take advantage of this? Well let’s look at the history of the USDJPY so that I can find out the character of this particular market and how it behaves to wedges and in particular what it does, when it does break out of a wedge.
Below is the USDJPY back in the year 2000. Yes over a decade ago. What I clearly see is the Yen creating a wedge formation, would you agree? What happens after a wedge is what I refer to as the ‘fizzy drink’ scenario. When you shake a can of fizzy drink (won’t be doing any free advertising here), there is a lot of fizz building up, but nowhere to go. Once you do open the can, there is only one way in which all the fizz can go, and that is up and out. Hopefully not spraying all over your freshly cleaned shirt.
In this case the yen broke out and up and ran strongly for about 1,000 pips. Not a bad run by anyone’s standards. This upwards run lasted for around two and a half months.
The next wedge formation that I noticed on the yen was in 2004 (refer to chart 3). Once the yen broke out, it ran down for approximately 800 pips, before turning around. This run lasted for about 2 months. A nice clear down trend was formed out of this wedge.
In chart 4, the yen created a wedge at the end of 2005 and finished in April 2006. Once at the end of the wedge, the market burst through to the downside for a total of 800 pips. This happened in the space of 1 month.
Moving along to the end of 2009 and early 2010 (chart 5), a wedge was created. The break out was explosive on day one, but the run only lasted for approx 370 pips. The reason for this was the ‘flash crash’ (you may endeavour to do some research on this if you like). One major note to learn from this is the importance of stop loss’s and risk management. Just because we are on a strong run, does not mean that we can be lazy on our risk management. It’s important! End of story. Major news (like what occurred here) or government intervention can play a decisive role in turning the market’s upside down. And that is why we must be on our toes at all times whilst in a trade.
In the next chart (refer to chart 6) was the massive breakout from a large wedge. The wedge along lasted 11 months! But with patience comes rewards. The market broke to the upside and ran for a total of 2500 pips approx. A move which saw many K2A students that I know, take some sort of profit from the run.
So are you starting to know and understand the character of the yen? By seeing what this market does in the past, it gives you clues and confidence of what the yen can do in the future. I am not going to spoon feed you, but hopefully you have been made aware of the point I am making here, and how my mind operates when viewing the markets.
There was also another very strong lesson told in this article. Risk management is critical in trading. Even if the market is doing exactly what you think it should be doing and is doing it, remember anything can happen. That is the market and you must accept what it does. No arguments. End of story. Our stop loss’s are our only line of defence in capital protection.