Three Choices

The US Dollar made a high against the Japanese Yen on March 15 this year, followed by a lower top on March 21. Since then, we have seen a pullback in price from 84.17 to 80.62 (at the time of writing, Wednesday morning, April 11, 2012). This is shown in Chart 1 below (code: FXUSJY in ProfitSource software).

Chart 1

click to enlarge

As traders, our job is to judge the strength of this move and determine the best opportunities for profits.

There are three choices for attacking this market at the moment:

1. We can take short positions
2. We can take long positions
3. We can stay out

(These are actually the three choices we have on every market on every trading day, but I digress).

So which is most appropriate in this situation?

Let’s take a closer look at the swing charts. Chart 2 displays the daily swing chart:

Chart 2

click to enlarge

The daily swing chart trend is clearly down at the moment, so Short Trades would seem to be the obvious choice.

However, when analysing swing charts we need to take into account the bigger picture swings as well. With this in mind, let’s take a look at the weekly swing chart, as shown in Chart 3 below:

Chart 3

click to enlarge

The weekly chart gives us a bigger picture perspective, showing that the US Dollar/Yen may in fact be in the process of forming a higher swing bottom.

The monthly chart shows an uptrend, which can be seen in Chart 4 below:

Chart 4

click to enlarge

With the monthly swing chart showing an uptrend and the weekly swing chart looking as though it is moving towards an uptrend, the daily down trend is beginning to look more like a pullback before a resumption of the bigger picture uptrend.

The US Dollar looks like it has more upside in it - at least against the Yen - so Short Trades look the riskiest of the three options at this stage. That doesn’t mean you can’t trade short, but you should be on guard for a change in trend and be ready to reverse positions if it does change.

Long Trades are fine if you are basing your trades on the weekly or monthly charts but daily swing traders would need to see the trend change first.

At this stage, I am in favour of Choice Number Three – waiting.

The US Dollar/Yen is approaching the important 50% retracement milestone of its weekly upswing, as shown in Chart 5 below:

Chart 5

click to enlarge

This price level at 80.08 will be an important area to watch for a potential change in trend. In next week’s Trading Tutors Newsletter article we will revisit this setup to see how it unfolded.

I would strongly encourage you to follow these charts every day (on ProfitSource software using the code FXUSJY) to see how this market unfolds. Because that’s what real traders do.

For more information about ProfitSource, click here.

In trading you always have three choices when dealing with directional trading – to look for long positions, to look for short positions, or to wait for the market to declare itself. It’s as simple as that. Don’t overcomplicate it!

Be Prepared!

Mathew Barnes