GBPJPY: The sleeping dragon

I want to start off with a general market concept that is very important for all to understand.

Here we see a weekly GBPJPY line chart going back to 2012. I have marked up two areas across the chart, namely: consolidation and expansion.

Don’t read too much into the shapes I have drawn to show the consolidations – I am not applying any technical analysis; I want to mark them up.

How do markets move?

Markets consolidate, expand, consolidate, and expand, and so on. This is true whether you are a fundamentalist, a technician or anything in between. It is also true across any timeframe you would like to analyse. If you use classical charting techniques, Japanese charting methods, Elliot Waves, etc., you will come to the same conclusion.
You will also find that you make most of your money when markets are expanding if you hold on to your winners. Most traders will find themselves losing when the market consolidates. Remember when you read that famous quote that said “know when to sit on your hands” or “no position is a position”? That day has arrived. No, it has been here for awhile.

What phase are we in now?

I would have to argue that we are in a prolonged consolidation

Price has been constricted for a long time. Am I saying that there are no opportunities while price remains in this 1000 pip channel? Of course not. The Dragon is one of my favourite pairs to trade, and I have taken many trades on it during this time. However, I am aware of the fact that the “big moves” aren’t happening at the moment.

The last few weeks have been particularly dreary:

I have drawn in the macro-consolidation (yes reader, I just made that word up) and also a tighter, more recent consolidation reflecting the last six weeks of price-movement (it would be wrong to call this price -“action”).
We see consolidation inside consolidation, like a Russian doll. A lethal Russian doll. It is not the expansions that wipe out trading accounts; it is the contractions that mill around stopping you out, again and again, that will churn your account into nothing.

About to get better?

I think so. Here is why:

Price has broken below the lower trendline in an expansion-type move (clearer on a shorter timeframe) and now is consolidating, suggesting another expansion move down is on the cards.

We have two scenarios:

  1. Price breaks lower as the start of a much more significant, expanding move, downwards.
  2. Price closes back up above the lower trendline, into the channel.

On a daily chart, it looks a bit like this:

If price manages a robust bullish close on the weekly timeframe, back inside its 1000 pip channel, look for longs, either to previous highs or even right up to the top of the channel. I have looked at the last high here, giving me a 300 pip target.

If, on the other hand, the current expansion/consolidation/expansion pattern we see on the daily timeframe continues, we could see 145, 140 and even 130 come into focus, and importantly, we would be trading with the direction of the big moves.

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