Finding Entries in Extended Trends

Focus: FOREX

Jeremy Wagner Image Jeremy Wagner Head of Daily FX Education, FXCM

Extended price trends can be challenging to trade, writes Jeremy Wagner of DailyFX.com. 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

chart
(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.