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How Did I Know the GBPJPY Was Going to Drop?

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Happy Friday!

This week’s question comes from Asha, who asks:

How did you know the GBPJPY was about to drop hundreds of pips? I thought the pair was in an uptrend. Thanks!

The truth is, I might be getting ahead of myself with this post.

As I’m typing the GBPJPY is still in the process of breaking multi-year channel support, so the breakdown isn’t confirmed just yet.

However, there’s no question that the pair is sliding, and fast.

This is something I’ve been discussing in the member’s area for weeks. Some had opposing views—which are always welcome—but there were a couple considerations that forced me to maintain my bearish outlook.

One to two messages daily. You can unsubscribe at any time. See our privacy policy.

I’m going to walk you through both factors in this post. By the time you finish reading, you’ll have a better understanding of how to use highs and lows to spot turning points, and how to use context to your advantage.

I released commentary on Friday about this very same breakdown. You can read that post here.

Read on to learn the two methods that allowed me to take advantage of this recent selloff.

It’s Never About ‘Knowing’

I get emails every week asking about how one can know a market is going to move higher or lower.

My response is always the same—it’s never about knowing.

You will never know what the market is going to do. That’s not your job as a Forex trader.

Your number one job as a trader is to protect your capital. Your second job is to determine likely outcomes or scenarios so that you can best position yourself to take advantage of these probabilities.

There’s no crystal ball or magic indicator that will allow you to know the future.

I want to make this clear because I think it’s easy to confuse the two. Even if you understand that there’s no way to know what will happen, it’s all too easy to see a setup or market structure as a sure thing.

That’s a dangerous way to think. It prompts you to become reckless with your capital. After all, why not risk 20% of your balance? It’s a sure thing, right?

Avoid that way of thinking at all costs. The best traders understand the importance of staying vigilant because they know that every set-up has a degree of randomness.

With that in mind, let’s discuss why this GBPJPY decline was likely.

1. Context is Key

You may recall the ascending channel I posted a few weeks ago. The pair had spent the last year carving this pattern, made up of higher highs and higher lows.

Here’s how it looked just a few weeks ago:

GBPJPY ascending channel on the daily chart

Clearly a bullish formation, right? The higher highs and higher lows tell us as much.

Not so fast. While it is true that the GBPJPY was trending higher, and to some degree still is, a view of the last few years paints a very different picture.

GBPJPY weekly time frame

The chart above shows the last five years of price action. It’s the same channel as the one in the first chart, but now I’ve added some context to it.

Looking at this, it becomes immediately clear why the ascending channel in the first chart isn’t so bullish after all.

In fact, it has the appearance of a bear flag. Essentially, it looks to be consolidation following the 7,000 pip decline from the last few years.

If that is the case, the ascending channel in the first chart isn’t a bullish pattern at all. Yes, it’s a short-term uptrend, but it probably isn’t something you want to buy and hold for the long term, especially now that the market has broken support.

This is an excellent example of why context is so important. Sometimes all it takes is hitting the “zoom out” button a few times to determine whether a technical pattern has bullish or bearish implications.

2. Focus on the Highs and Lows

If you ever find yourself confused about the price action in front of you, this one simple technique can clear it all up.

The best part is that you don’t need any fancy indicators. Heck, you don’t even need to draw any levels for this exercise.

All you need to do is identify the major swing highs and lows on the daily time frame.

Let’s take a look at the GBPJPY daily price action once more.

GBPJPY lower highs into support

Notice how the pair had been carving higher highs and higher lows for about a year.

However, just recently the pair began to struggle to make higher highs. This should have been the first red flag if you were bullish about the GBPJPY.

Even if you just take a step back after identifying the major swing highs and lows, you can see that the market had started to change direction recently. In other words, its behavior began to deviate from the previous twelve months.

As discussed earlier, the context of this ascending channel painted a relatively bearish picture. However, the first sign that buyers were tiring came earlier this year with their apparent inability to retest channel resistance.

Final Words

Trading successfully is never about knowing which way the market will move. Nobody knows the answer to that, and those that believe they do are bound to be disappointed.

There’s no such thing as bullish or bearish patterns without context. Even if a technical pattern has taken a year to play out, it’s imperative that you put it in context of the broader multi-year picture. It might just change your outlook on the market.

If you’re ever in doubt, take a step back and focus on the highs and lows. It’s a great exercise that will not only help you determine the likely path forward but also build a connection between you and the ebb and flow of a market.

Your Turn: Ask Justin Anything

I’d love for this new weekly Q&A to be successful and provide an invaluable repository of answers to common Forex questions.

To do that, I need your help.

Here’s what you can do to get involved and have your question answered in next week’s post:

  1. Ask questions. Post them in the comments below or Tweet them to me @JustinBennettFX
  2. Help me answer questions. If I missed something or if you have something to add, don’t hesitate to leave a comment below.

Leave a Comment:

58 comments
Emuobo Agbahovbe says

My question is not related to today’s discussion. For sometime now, I have tried registering on your website and I am always directed to the ultimate swing trade cheat sheet. Please can you post a link that works for registration? Thanks.

Reply
    Justin Bennett says

    What do you mean by “registration”? Are you referring to the member’s area?

    Reply
Felix says

Always been a fan of your analysis. It all makes sense ! Simple as that. Sir, would you mind sharing some techniques to understand fundamental analysis ? How to analyse news impact on forex market? Thank you

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    Justin Bennett says

    Cheers. Simple is all you need.

    I’m 100% technical, so I don’t use fundamentals in any way. Everything I need is on the chart.

    Reply
Carpenters says

Justin…i really need to know….from where n where we should make a trendline….and how to predict that the market will break the trendline…need more clue and more more more oponion.

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    Justin Bennett says

    You’ll want to use the search bar on the right side of this site. Type in something like “trend lines” and you should find what you’re looking for.

    Reply
Madueke says

Wao, I just added a lot more to my learning curve with this analysis. Thanks Justin. Best wishes always

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    Justin Bennett says

    You’re welcome. Always happy to help.

    Reply
sanjeev says

sir I post a comment on facebook please check it

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Farid says

Dear Mr. Bennett
You analysis was really great. You cover all. Also GBP near past major news results was negative from forcast.
Thanks
Farid

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    Justin Bennett says

    You’re welcome, Farid. Glad to know you found it helpful.

    Reply
Eutie says

You never disappoint sir, does blueberry offer demo accounts?

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Hans says

Is that a good idea identifying swings
Highs highs lows
Featured with the stochastic

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    Justin Bennett says

    I can’t speak to Stochastics because I don’t use it, but identifying swing highs and lows is always a good idea even if you don’t actually circle them on your chart like I did in this post.

    Reply
    Jan says

    All indicators have a time lag. It’s better not to rely on them. Learn price action and volume as these are the two purest indicators there are 🙂

    Reply
      28 says

      Hi Jan, Glad you mentioned Volume, as it has been more or less rejected by Forex traders because it has been so hard to come by. There is no central exchange for currency transactions, so there is no perfect way to measure the amount of volume actually being traded. Whats your take on this statement?

      Reply
Lori Hook says

Thanks so much, Justin! I found this post incredibly helpful. Thank you for walking us through the chart analysis step by step, and for adding a reminder to always consider the context using the “zoom out”. I have found that when I approach the market using this technique, my trades have a better success rate.

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    Justin Bennett says

    Cheers. You’re very welcome.

    Reply
Sandi R says

This was certainly a wakeup moment for me. You really have a way of explaining the markets. I really do appreciate the way you explain it. Do you agree that it is more about price action than patterns, such as head & shoulders , flags etc. Using support and Resistance(highs & lows) and possibly an over bought or sold indicator to confirm any changes the market may change to. Candle patterns do
sometimes help, but not always accurate. Candle patterns, I think should probably be easy for most, but I am still confused with them.
Maybe you could touch on that again for some of us amateurs.
Thanks for all your help.

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    Geniusbami says

    I want to reiterate something I read here sometime ago, that candle patterns should be read in the context of where it forms.

    Thank you.

    Reply
    Justin Bennett says

    I wouldn’t compare chart and candlestick patterns that way. Chart patterns such as a channel give us an outline while a candlestick pattern such as a pin bar can act as a signal.

    They both offer insight into supply and demand, but they serve very different purposes. A combination of the two is the best approach in my opinion.

    Reply
    Jan says

    Read Forex for beginners by Anna Coulling. It simplifies our approach in the market and has transformed my trading success

    Reply
Ouirrou says

Hi Justin,can you give us or tell us about wick fill trading and what you know about it thank you very much

Reply
    Justin Bennett says

    I’m not sure what you mean. Apparently, I don’t know much about it.

    Reply
Pete says

Very educational. I know your a long term trader but I enjoy scalping and was hoping you might have some valuable insight on the subject.

Thanks

Reply
    Justin Bennett says

    Glad to hear that.

    No, sorry. I’m the wrong person to ask about scalping.

    Reply
    Jan says

    If your analysis is done from the top down (daily and downward TFs, I have found it gives a good overall picture. Look at drawdowns on trends.

    For example on a bull trend, how far does it drop before pulling back onto trend?

    As a novice trader I looked at overall trend without taking that into account and would get stopped out. Assessing this potential drawdown has massively improved my results 😊

    Reply
Howard says

Justin, as a trader of the daily TF (time frame) do you also use the weekly TF to help with context, and perhaps the H4 to help with more precise placement?

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Howard says

Thanks Justin, very helpful.

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Euphemia says

Hi Justin,
Thanks for the post, always helpful and insightful.

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Richard says

Eye opener and reminder of the longer time frames value.

Thank you again.

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Rickwin says

Thanks for your analisis and Justin. I’m really appreciate your weekly analisis and I hope you continue to share your thoughts and suggestions.

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michael walker says

I accept what you are saying.However because of political uncertainly I noted a sudden rush to buy the JPY in the Asian session and managed to gain approx 100 pips before the close

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Mary says

Thanks Justin, you’ve been a wonderful commentator. Your analysis on GBP/JPY is just on point. Please could you take a look at USD/CAD as the pairs seem to have the move with GBP/JPY. thanks.

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Edward says

This was a nice new lesson to me as a new trader who aspire to go extra miles.The context !!!

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ARUMUGAM says

Thanks Justin for your valued information.

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Andrzej says

Witam Justin! Mam takie pytanie czy dla człowieka, który pracuje zawodowo po 10 godzin trading ma jakiś sens? Jeśli tak to od czego zacząć, jakich interwałów i jaki jest dobry sposób aby podejmować dobre decyzję przy tak napięty dniu pracy? Pozdrawiam.

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Maher Jebbeh says

Hi, since GBP/JPY is directly connected to the price movement of GBP and JPY in relation to the US$, how could we be sure that GBP/JPY will move up or down without relating their movements to the US$?
Thanks

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Praise says

Hello Justin thanks a lot for that insight. Please I stand to be corrected if am wrong. Since you said the basis for your trading is pure technical and when applied well will make you understand how market the works. Don’t you think fundamental issues may affect technical analysis. Thanks.

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    Roy says

    I used to think that too, that somehow fundamentals must play a part, after further investigation after 6 months i concur that the news is in the price action.

    Fundamentals is just to difficult to grasp. Better to keep trading simple with what is happening on the charts.

    Moving to the daily time frame will help with that overall, it is the best thing i have done as a trader to help me stay consistently profitable.

    Reply
Joe says

Justin, can you base on this analysis to show how can we enter a trade either long or short…thanks

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Good luck says

Enter your comment…since I don’t know were the market is going to move how do I place my trade

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Rene says

I swear all your posts, thank you 🙂

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isaac says

i notice that your analysis on levels most of the time is accurate.p/s can you educate us about market levels of some major currencies. thanks

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Felino JR Ignacio says

It was broad but simplest explanation,for me it’s Justified.

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H.Cermak says

A pretty good lesson once again to open our eyes for what is already there. Thanx Justin

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Sami says

How higher or lower from 10 & 20 EMAs, in terms of pips, is market considered overxtended?

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Alex Andalibfard says

justin I have learned so much with you and I like to stay with your daily forex setups that can help me alot and I keep study your lessons. I thank you very much you are a very good teacher.

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Nwosu Onyeka Nelson says

Love the wealth of information i get when ever i read your Q&A post or the general weekly price action. Keep it up.

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Olamide says

Good Evening Sir, I draw my trend my trend line on daily chart but It shows that the trend as just broken recently but when I look at weekly chart it show that the price just reject the trend line so am confuse about which one should I believe in and the pair is EurCad, you can help me check it out. Thank you.

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FELIX GREAT says

Thanks Justin for this piece. god bless you Sir.

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rhonda says

How do you determine exactly when to enter a trade. I keep hearing about numerous candlestick signals, but I almost always enter too early or end up chasing the market(like a missed bus). lol

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rhonda says

How do you determine exactly when to enter a trade. I keep hearing about numerous candlestick signals, but I almost always enter too early or end up chasing the market(like a missed bus). lol

Reply
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