Super Yellen Saves the Buck, USD/JPY Posts a Bullish Engulfing Day!
Eric Furstenberg • 4 min read
What a day in markets, guys! I really like what I’m seeing today. At last, we’re getting some decent volatility. As I’m writing this trading plan, there are many traders who are biting their nails right now, who are caught on the wrong side of the market, stuck in losing trades. Other traders have already been stopped out of their losing positions, and so we can continue. On the other side of the coin, some guys have been harvesting pips left, right, and center!
So how do we know that many traders were caught out today? Keep on reading and you’ll learn something interesting about order flow, and what happens when we see the formation of certain types of candlesticks. Before we go into all these details, let’s look at a daily chart of the USD/JPY:
USD/JPY – Watch Out Bears!
USD/JPY Daily Chart
The US Dollar benefited greatly from Janet Yellen’s speech today, but it was seen especially in the USD/JPY exchange rate.
Look at this daily chart of the USD/JPY. Here we see a notable shift in the USD/JPY technicals. Not only did we see a false break lower (or fakeout) a few days ago, but the pair also managed to close above its 20-day exponential moving average yesterday and today. Whenever we see a pair close above this moving average, we need to be especially careful about trading it on the short side.
To get back to the traders who are sitting on the edge of their seats right now – when we look at certain candlestick shapes, we can draw valuable conclusions to what actually happened during their formation. The trained eye will immediately know what the order flow was like, and what might happen next as a result of that order flow. Let’s use today’s candle on the USD/JPY as an example. Here is the same chart with the last three candles magnified:
USD/JPY Daily Chart
Let’s first take a look at the second last candle on this chart. It has a relatively large upper wick, which, together with its location on the chart enticed the sellers to re-enter the market, thinking that the bulls were defeated. This, and perhaps some other factors moved the price to break below this particular candle’s low.
When the price moved below the 20-EMA, the sellers’ confidence increased and additional sellers entered the market. Later in the day, the bearish momentum was abruptly interrupted with aggressive buying pressure. This caught many bearish traders off guard, and on the wrong side of the market. As the price progressed higher, more and more short traders were forced to close out their short positions which just added more and more fuel to the buying pressure. The traders who sold near the low of today’s candle were either stopped out already or are either holding on to losing positions. Today’s candle has trapped many bearish market players who thought they had control of this market.
It is a common occurrence to see bullish follow-through after a bullish engulfing day like today. If we know this, we can position ourselves to take advantage of it. But where would we enter, and how would we manage our risk?
The first way to trade this setup would be to trade a topside breakout of today’s candle. Look at the following chart:
USD/JPY Daily Chart
This setup has the advantage of using confirmation. If we don’t see a further rise in this exchange rate, our trade will not be triggered. The disadvantage is that we’re using a large stop loss, and buying at a relatively high price. Here the target is twice the size of the stop loss.
The other way to trade this is to wait for a retracement of today’s bullish engulfing candle to time your entry. Look at the following chart:
USD/JPY Daily Chart
If you place a buy limit order at the 50% retracement of the candle, like in the chart above, it will allow you to use a much tighter stop loss, and you could achieve a better risk to reward ratio. In this setup, the target is three times the distance of the stop loss. Notice that although the target is three times the distance of the stop loss, this target distance is much shorter in pips than in the first example where the target is only two times the distance of the stop loss. This makes the second trade setup with the tighter stop loss and better entry price very attractive, although it is riskier because of the tight stop and the lack of confirmation of a bullish breakout. If you use this retracement strategy, you also stand a chance of the price bouncing higher without triggering your buy order.
Some traders like to combine these two trading strategies and split their original position into two parts to make sure they are triggered into at least one of the setups.
This type of whipsaw-like price action was not only seen on the USD/JPY today. Many other instruments made some violent moves in one direction, only to reverse to the opposite direction after a while. We know that FED Chair Janet Yellen’s speech caused much of this whipsaw. We saw this in the equity markets as well, although it was perhaps on a smaller scale than on the USD/JPY. Let’s look at the S&P 500:
S&P 500 – This is unbelievable!
S&P 500 Hourly Chart
Do yourself a favor, and check out a daily chart of the S&P 500. If you ever wondered what a strong uptrend looks like, look at the S&P!
The price action in the blue circle is part of the effect of Janet Yellen’s speech. The bears got beaten up by the bulls, in the end, resulting in a magnificent bounce higher.
Remember that we have another speech by this lady tomorrow at 15:00 GMT. We also have UK employment numbers at 09:30 GMT, and U.S. CPI and retail sales numbers at 13:30 GMT. Brace yourselves for more volatility!
Best of luck guys, I hope you have a profitable day tomorrow!