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Thursday, March 17, 2011

Trend for 17th of March 2011

Trend after a breakout

The best time to trade a trend is to trade a breakout after a security or securities have stayed within ranges for some period of time. As you may know currency pairs stay in ranges 90 percent of the year and only 10 percent of time they trend. This is due to the fact that securities need direction and when they get it from some fundamental event or a generally good or bad economic situation, the data is very fast priced in and trend ends up and a prolonged period of ranges start again. One can trade very profitably within ranges, but it is much easier to trade a trend than a range. You can get ready before a trend starts and jump into it at the very beginning of it. So, trends can happen both on macro and micro levels. By micro I mean daily trends.

Today I wanted to look at usd/jpy pair that broke out of its 2 month range and dropped four hundred pips over a night. This move could have been predicted. Over a period of these 2 months a pair reached 81.00 level two times and reversed at the level. On the 13th of March the pair visited the level again and quickly went through it. However, as fast as it went it also retraced even faster back into the range. This was connected with the current crisis in Japan. But, it looks like the Forex market did not want to think much about the event and yen pairs went back to breakout levels. When these kinds of things happen you can be sure that a true breakout is looming. So, you could have traded this breakout by simply placing a limit sell order below 80.50 level and went down together with the market as long as it showed the signs of reversal. 

I know that it would have been pretty difficult to catch the whole move, but you could have grabbed at least half of it. You would have closed your position either at 77.80 or 78.25. The way the pair behaved today also tells me that the move was probably short term and now we will probably have ranges again. The last day of a trend is usually very dramatic and a pair can go from 300 to 1000 pips and come back the same distance. This kind of behavior in prices tell me that range are in store for us. You can look at the chart to see how you could have traded this trend in usd/jpy

My previous posts:

gbp/jpy trend