Price action of currency pairs reveal their trend, market sentiment
Price action is a treasure trove of information about the trend of a currency pair and what the market feels about it i.e. market sentiment. Looking at this example of USDJPY, I recall some lessons I wrote here about these concepts that are important to trade forex.
- Trend is defined as a series of highs and lows.
- Boundaries of price action such as yearly, monthly, weekly even daily highs are lows are natural support resistance levels.
- When price penetrate support resistance levels, they are very telling: successful penetration can be linked to continuation movement when it is in line with trend or it can be a reversal signal. False breaks or false penetrations are often stop hunting action or bull bear traps.
- Open price levels are important levels whichever time frame we go to; how price performs in relation to its opening price is an indicator of bullish or bearish sentiment.
USDJPY narrative: highs, lows and market sentiment
USDJPY fell for the past 4 weeks (pink boxes). Each week is defined as a series of lower highs. Lower lows confirm the downward action. The down trend started when USDJPY price penetrated its previous week low significantly on the down side. We call this a bearish expansion (point 1).
This week is the first time that this currency pair is bucking the trend. A higher move, bullish expansion, on Monday (point 2) terminated the series of lower highs. Since the week is not over yet and price has retraced, we reserve opinion for now. It could be a false break so that the price move above created a bull trap. It could also be the signal for a rally later.
There is one clue that reinforces bullishness. That is price is now above October open at 98.23, that it bounced off the level yesterday (point 3) indicating support. Erases losses in first 2 weeks of the month.
Planning a trade; my psychology and how I approach this pair
- Price action showed us resistance is at 2-week high when price recoiled from that level yesterday.
- It also shows that support is a wide zone at the confluence of 3-week low with 98.23 when price bounced up today.
- The prudent approach to this pair is to assume that it will resume its downward move. It is after all the trend for the past 4 weeks; we should never anticipate changes in trend until it happens.
- We presume that early week break is a false breakout.
- To continue falling, support must give way.
- If support remains intact after multiple tries or price makes another high, then we have ample evidence that USDJPY is reversing.
Director, TerraSeeds Market Technician Pte Ltd. Trader, investor. @sohtionghum was picked ‘Top 70 Forex Twitter in 2015’. Operates multiple strategies.
“Dear reader, I do not have a financial license to give advice. I do not know you the reader. Your financial objective and risk tolerance may be different from mine. I am not responsible for any consequence of your action.