Finding Entries in Extended Trends

01/23/2013 9:00 am EST

Focus: FOREX

Jeremy Wagner

Head of Daily FX Education, FXCM

Extended price trends can be challenging to trade, writes Jeremy Wagner of You don’t want to enter for fear of a healthy correction, but you don’t want to trade countertrend either.

The GBP/JPY has been in a monster trend by moving over 1300 pips in the past two months. One concern of trading a monster trend is entering a tiring trend. We can see how the highs on January 13 are met with a diverging Commodity Channel Index (CCI) reading. This divergence tells us that momentum is slowing and prices are likely to correct.

Therefore, it is risky to enter into the pair as a buyer…prices may experience a correction. Additionally, it is risky to enter the pair as a seller, because we would be trading against the stronger trend to the upside. As a result, we are left with waiting out a potential correction and use that correction as a means to enter the trend.

GBP/JPY Divergence

(Created using FXCM’s Marketscope 2.0 charts)
Click to Enlarge

Last week, we discussed the 138.00 level as possible support to consider entries. Now that we have another week of price data, let’s reassess our support levels for possible entries. As a result of price action taking place this week, two levels of support emerge giving us an opportunity to set up long trades for the coming week.

Viewing Forex Chart (GBP/JPY)
When implementing forex technical analysis, namely measuring waves using Fibonacci extensions, two support zones emerge. (The Fibonacci extension is applied using the Fibonacci expansion tool in the Marketscope 2.0 charting package.)

GBP/JPY Fibonacci Extension Targets 140.00 and 137.50

(Created using FXCM’s Marketscope 2.0 charts)
Click to Enlarge

These support zones rest at 140.00 and 137.50. What is particularly interesting is how the monthly pivot point also resides at 137.78, which is close to the 100% Fibonacci extension at 137.50.

Therefore, we have identified two solid areas of potential support for the GBP/JPY. Now we sit back and wait for prices to undergo a healthy correction. If prices reach the support zones, then we’ll look for bullish signals through oscillators and/or candlestick formations before taking any trades.

By Jeremy Wagner, Head Trading Instructor, DailyFX Education