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Trading patterns are bread and butter for forex traders and reversal patterns the best of the bunch. This is what a textbook price reversal looks like.

The best trade you will ever make

Trading patterns are the bread and butter of forex trading. They are recognizable, repeatable, predictable price movements traders can use to pinpoint entries and exits for their trades. The reason they are so well liked is because they bring virtually guaranteed profits (no profits is 100% guaranteed, even a great trader can flub up a great trade), the problem is that they (the really good price patterns) don’t form all that often and when they do they often don’t look like what you see in the textbooks.

The USD/JPY Has Reversed

The USD/JPY has reversed. The pair has formed a classic head & shoulders bottom and confirmed reversal with a break above the neckline. A head & shoulders bottom, or top, is one of the most reliable patterns consisting of three successive lows, or highs, in which the second is lower than the first and the third is higher than the second. These lows can typically be strung together by the peaks that form between them forming a pivot point/resistance level known as the neckline.

Patterns such as this can form within a sideways trading range, so caution is due, a break above the neckline followed by a confirmation of new-support at the neckline is required to confirm reversal in prices. That is, to confirm that price action has begun to move up.

USD/JPY Has Reversed

Once confirmation occurs you can project a target exit by using the magnitude of the pattern. In this case the lowest low, the head, is at 104.16 so subtract that from the neckline, 107.00 and get 2.84. This means traders can expect to see the pair move at least 2.8400 in the first rally from support. Support is at the neckline which means 107.00 + 2.84 = 109.84. You can see in the chart that the pair has indeed moved up to that level and is fast approaching the resistance target. At this time, it may be prudent for traders already in the trade to take some profits, but the rally is not over.

USD/JPY first rally

The first rally from support took a pause just above 109.00. This pause resulted in a continuation pattern which suggests this first move up is only half over. Projecting the magnitude of the first leg, about 002.00, suggests the rally will move up to 111.00 in the near term. Looking at past price history we can confirm the 111.00 as a possible resistance target. This target, now that price action has broken out of its consolidation/continuation pattern, is likely to be hit in the next few days.

What’s driving this move? The FOMC and the BoJ. The BoJ struck a hawkish note two weeks ago which sparked the reversal. The FOMC is on track to tighten at least two more times this year, maybe three, and is holding a policy meeting right now. Their statement, released Wednesday afternoon, could be the trigger to drive this pair up to 111.00 and possibly higher.

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NOTE: This article is not an investment advice. Any references to historical price movements or levels is informational and based on external analysis and we do not warranty that any such movements or levels are likely to reoccur in the future.
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