The key to mastering the USD JPY is to understand the relationships among pattern, price and time. Each element is important in the development of a trading plan, but one should not dominate over another.
Analyzing USD JPY Using Pattern, Price and Time
Pattern and Price (Part I)
The key to mastering the USD JPY is to understand the relationships among pattern, price and time. Each element is important in the development of a trading plan, but one should not dominate over another. Although one can attempt to develop a trading plan using just one of these tools, the best trades tend to come from at a minimum the balance of price and time.
Before attempting to trade the USD JPY it is highly suggested the analyst follow this three-step process:
1. Decide the type of system: trend-following or support/resistance. Questions should be asked that determine whether the USD JPY is a trending market or a range trading market. This requires study, research and experimentation to attempt to learn the characteristics of the USD JPY.
3. Determine the placement of stops. What is the safest initial stop and trailing stop for the USD JPY, under a swing bottom or under an uptrending Gann angle? Over a swing top or above a downtrending Gann angle.
Understanding the interrelationships of pattern, price and time will help the trader develop a system which adheres to the three-step process.
The following article is an excerpt from my book Pattern, Price & Time (Using Gann Theory in Trading Systems). Each technique described in this article is used in the development of my analysis and trading strategy in my daily and weekly newsletter The Forex Pattern Price & Time Report.
When analyzing the USD JPY using Pattern, Price and Time Theory, pattern is defined as the study of market swings. Swing charts determine trend changes. For example, the trend in the USD JPY changes to up when the market crosses swing tops and it changes to down when the USD JPY crosses swing bottoms. The trader can also gain information from swing charts about the size and duration of the USD JPY’s movements. This is how price, which is size, and time, which is duration, are linked to a pattern. In addition, the trader can learn about specific characteristics of the USD JPY by analyzing the patterns formed by the swing charts. For example, the charts delineate the USD JPY’s tendency to form double tops and bottoms, signal tops and bottoms, and the tendency to balance previous moves. (Fig 1)
USD JPY Main Trend Swing Chart
In Pattern, Price and Time Theory, price analysis consists of swing-chart price targets, angles, and percentage retracement points. This means that the analyst must create a swing chart of the USD JPY in order to know how to determine swing-chart targets, where to begin the angles, and where to find the top and bottom of the range to find the percentage retracement points. (Fig 2)
USD JPY Gann Angle and Percentage Retracement Chart
Swing-chart Price Targets
After constructing a swing chart for the USD JPY, the trader creates important price information that can be used to forecast future tops and bottoms. These prices can be referred to as price balance points. For example, if the USD JPY swing chart shows the market has had a recent tendency to rally 4.00 – 6.00 points before forming a top, then from the next bottom, the forecast will be for a subsequent rally of 4.00 to 6.00 points. Conversely, if the market has shown a tendency to break 2.50 – 3.00 points from a top, then following the next top, the trader can forecast a break of 2.50 to 3.00 points. If the swings equal previous swings, then the market is balanced. (Fig 3)
USD JPY Swing Chart with Price and Time Data
Geometric angles are another important part of Pattern, Price and Time Theory. The markets are geometric in design and function, so it follows that they will follow geometric laws when charted. It is very important to use the proper scale for each market when charting to maintain a harmonic relationship. Therefore the analyst should choose a price scale that is in agreement with a geometric design or formula. In the case of USD JPY, use a scale of .25 points for the daily chart and .50 points for the weekly chart. Using the proper scale allows the analyst to draw a 45-degree angle which divides the USD JPY into important price and time zones. This angle is usually referred to as the “1X1” angle, because it represents one unit of price with one unit of time. There are also other proportional geometric angles to divide price and time. These angles are known as “1X2” and “2X1” angles because they represent one unit of price with two units of time and two units of price with one unit of time, respectively. All of the angles are important because they are used to indicate the trend, timing, and support and resistance. The key characteristic of a properly scaled angle is its predictive value for future direction and price activity. All of which is necessary to know in order to forecast where the USD JPY can be in the future and when it is likely to be there. (Fig 4)
USD JPY Gann Angle Chart
Percentage Retracement Points
Just as pattern, price and time angles offer the trader price levels that move with time, percentage retracement points provide support and resistance that remain fixed as long as the USD JPY remains in a price range. W.D. Gann is the analyst most commonly acknowledged to have formulated the percentage retracement rule, which states that most price moves will correct to 50%. Other percentage divisions are 25% and 75% but the 50% level occurs most frequently. While Gann used 8ths to divide the range, some traders prefer to divide the market into 10ths while others place more emphasis on the major Fibonacci retracement percentages of 38.2 and 61.8.
USD JPY traders who apply pattern, price and time analysis to the market usually increase the odds of success if they use just one of the price indicators such as swing-chart balance points, angles, and percentage retracement points to find support and resistance. In essence, however, the combination of two of the price indicators often provides the trader with the best support and resistance with which to work. For example, while the uptrending 1X1 angle from a major bottom in the USD JPY and a 50% price level provide strong support individually, the point where these two cross provides the trader with the strongest support on the USD JPY chart. (Fig. 5)
USD JPY Percentage Retracement Chart