How to recognize a bottom in the USD/JPY pair

One of the big questions for every trader is "Is this the bottom?" First, we must admit that this endeavor is one of the riskiest in the business. Falling knifes and sometimes falling refrigerators are, by definition, things that you do not want to catch when they fall.

Nevertheless, we must know, as traders, when there is a big chance that a bottom is in and when it is not even close. If you are so incline, this recognition point could be the first level where you will nimble in on the long side for catching the reversal move.

The attached weekly chart of the USDJPY is trying to give us a guideline for recognizing the most probable bottoms. We have marked the bottoms with blue numbers and as you can see, everyone, besides number 5 (left) and the current one (9), had a tradable up move afterwards.

Now, let see how we define the parameters for searching the bottoms:

There must some kind of big price drop (hammer – Needle down) at the exact week of just before hand. This price action is often called and "exhaustion" and is a sign of some capitulation from the people holding the long positions.

The RSI indicator should be at or under the 30 level. The lower it is, the better and longer the rebound could be (violet rectangles).

The third and most important is our own indicator: we calculate the difference between the value of the pair and its 200 day moving average and we display it as a percentage of the current pair value. As you can see, in the lower part of the chart in orange, the range is between -20 and 20 while the extremes on the long side are in the minus side of 0. Let's call this indicator: DIFF.

So if you combine the three items you will get the following definition:

When you have some kind of violent move down, it will be a tradable bottom if the RSI is at 30 or under and the DIFF will be over 5%. Lower RSI with higher DIFF values will give you better and better bottom probabilities. Good examples are 1, 2 left, 3, 6, and 8.

Therefore, the current situation, 9, is looking very suitable to the definition and has a good probability to be a very good bottom. 

Disclaimer

By no means do any part of this article recommends, advocates or urges the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author and his company express personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this article. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. The content of this article was created with the best known data at the time. The writer and his company are not responsible for the accuracy or completeness of the mentioned data. The writer is not a registered consultant of any kind and so the reader should not see any single part or the whole analysis as an advice for any kind of action in the financial markets.
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About the Author

Moshe Shalom Head of Technical Analysis Department ForexManage Ltd Site: www.forexmanage.com Email: This email address is being protected from spam bots, you need Javascript enabled to view it