Trading Psychology and Trading Patterns – when the usdjpy broke the 100 level


Trading with price charts in the currency markets implies looking for repetitive shapes that happened in the past and by the time current price is making a shape like that traders have an educated guess about the possible outcome. This is what is known as a price pattern.

So looking for patterns when trading is one of the things that traders have in common as this helps forecasting price for the next period, depending very much on the time frame the pattern is being identified. If, for example, a head and shoulders pattern is identified on the weekly or monthly chart, then the measured move for it implies quite a strong move price will make.

When patterns are being used in combination with market psychology, the analysis becomes even more complex. It gives the trader a competitive advantage as, on one side, the pattern represents something from the past that can be projected into the future and on the other side market psychology comes to confirm/infirm that specific move.

The ideal situation to explain this combination is when the usdjpy broke the 100 level for the first time. The 100 level was such an important level that one broken the algorithms that are running on the currency markets basically changed the way the correlations functioned up to that moment.

The chart below shows you the USD/JPY on the four hours time frame and it shows the fact that the pair is traveling in a powerful bullish trend from the 75 area to the 100 level, and, just like that, fails to break the level with three different attempts.

USD/JPY price chart
4-hour price chart of USD/JPY

Such a round number usually represents a psychological level for traders and because markets are supposed to be the sum of human behaviors then this should be seen as well. So failed attempts on the level made actually the level to be more and more appealing and price to be attracted for it.

So what should be the pattern to look for in such a case? Well, the answer lies in continuation patter: contracting triangles, pennants, flags, etc. In this specific case we are talking about a contracting triangle price makes before breaking the 100 level and it is clear and visible how price builds energy to break such an important level.

100 level breakout in the 4H price chart of USD/JPY

After the five waves of the triangle were completed, what we witnessed was an explosion through the 100 level, stops being triggered and the whole pattern to end with that break. So for price to travel such a big distance and stop on the 100 area without breaking it, or at least test it is something that usually is not happening when trading. And this case is just another example of how market psychology and continuation patterns are working hand in hand for a profitable outcome.

In conclusion, trading psychology and patterns are a powerful tool when they are pointing into the same direction and should be considered all the time as a key element in trading financial instruments.



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