EUR/JPY Decending Triangle Pattern
Euro Fx/Japanese Yen FX:EURJPY
As you can see This is a chart pattern also known as the “Descending Triangle. Now, what could we extract from this technical analysis pattern.
Before we dive into that, I find it important for you to understand how I build a strong foundation for my suspicion the become a confident prediction.
First. As you can see, There is a Purple horizontal line. The sellers are not able to bring the price lower than this level. I may call this the Trend line of Support. The sellers are not able to bring the price lower then this level.
Second. When connecting the dots of the swing highs of the trend, you can define a clear line going lower. This line I will be calling the “Trend line of resistance”. when the buyers are trying to bring the price up, they are resisted and bounced off this level.
When we now add together the: ‘Trend line of Support’ and the ‘Trend line of resistance’ the lines form a descending triangle . So, how could we use this pattern to forecast the trend movement?
We could use this by acknowledging the following fact. As you can see. the Trend line of Support is horizontal and fixed on a specific level. Now the Trend line of resistance is heading down, in direction of the trend line of support. When the trend of resistance is getting lower, the price candles are getting squeezed (they are getting smaller). This means a descending price fluctuation also known as a decrease in volatility . As Volatility is like a wave, going up and going down. We can predict that this descending triangle is preparing the price to explode. you could use the metafoor of a coil spring, getting squeezed together only for it be returning the force implied outwards again.
Taking from this we now know. The price is decreasing in volatility . The price is bounced between 2 trend lines that are making it clear for us to see what the cataract of the trend is, and with this pattern we will be able to tell in witch direction the trend is heading. Resulting in a strong founded analysis making us able to enter the trade witch confidence.
To go Long or Short?
I like to point out first that as a result of taking a trade in low volatility , we are able to put our stop loss close to our market entry, enabling us to enter a trade with high reward for low risk. Now, how to enter this trade?
The First probability:
When the trend crosses the Trend line of support (horizontal pink line) you would go short. Because when the trend would cross this line, the sellers have finally managed to push the price lower then this level that they were not able to cross many times before. Meaning something has changed, making the sellers finally strong enough to break thru this level of support. Giving a strong sign for you that a downtrend has started and will likely continue for a while because remember the first law of motion: An object stays in motion until a force equal or greater is thrust upon it. Once a Trend is started it is more likely to continue then to reverse.
The Second probability:
The price goes thru the line of resistance, Showing that something happend (An object stays in motion until a force equal or greater is thrust upon it) that made the buyers able to break out of this descending price trend and are now bringing the price up. When this occurs you will go Long, knowing that something game-changing happend that gave the buyers the strength to bring the price up, you are now joining the ride because remember, Once a Trend is started it is more likely to continue then to reverse,
A Cherry on the pie
As the candles are getting smaller and smaller ( volatility getting lower) while they are getting squeezed between the trend line of resistance and the trend line of support, it will bey ferry likely that a big outburst will occur. because as I mentioned volatility moves in waves from high to low. and after low comes high. So you are able to place a tight stop loss while being able to catch a big price outburst, resulting in a risk/reward of high quality. You can have your cake and eat it to.
In the chart, the 2 entry levels (long/short) are visible with a red circle. The blue pointers show a short summary of the analysis.
I am open for critique, if you like to share your opinion on this analysis do not hold yourself back.
I hope you enjoyed reading this as much as i enjoyed writing it.
May you have a pleasant day