An institutional trader told us once about his obsession – trendlines. He even boasted about how wonderful his software was because it had a magnet function, the kind where you could pin your trendline precisely to the tail or close of a candlestick.
Why this obsession? Because professional traders could not really forecast price movement. But with trendlines, they could make low risk, high probability bets. Put another way, trendlines define the boundaries of price movement by acting as support and resistance. And because the FX market was so technical, you could get it right if you saw the same trendline that others in the market saw.
If we applied that strategy to the USDJPY, then the story goes like this:
- USDJPY continues to be in a downtrend based on the daily chart.
- It has however broken the neckline of an inverted head and shoulder chart pattern and so is making a reversal move.
- Price is likely to operate in the green zone because the line on top is a resistance and the neckline below is a support.
This observation is made simply by laying down the boundaries with 2 sets of equidistant channels and an additional trendline.
Dollar in downward channel although a reversal chart pattern is visible
