People are still debating latest explosion in Yen and other financial markets. Regulators are pouring over the records, hoping to pinpoint the cause of panic. While it is perhaps important from the point of view of financial industry as a whole, it is of little practical value to a trader. It is very unlikely that similar situation will happen again soon, so predicting it and creating strategies trying to exploit whatever the “event” was, is largely futile pursuit. It is probably better to look at charts and see if there are any lessons there.

Japanese Yen pairs had very large moves for one day. They were comparable to what happened in 2008, during the famous “unwind” of carry trade and came to an end on what could be described as a blow out pattern. Blow out term is typically used to describe a top, but the reverse is also true. Often “exhaustion move” is used alternatively. Both terms apply to a situation when price advances, or falls at an accelerating pace, moving much more that most recent history. Chart takes on parabolic shape and eventually sharp reversal takes place, normally in one price bar (candle).

It doesn’t really matter what time frame is discussed, blow out, or exhaustion patterns, happen on all of them. What is important, is the length of trend preceding them, expressed in number of bars(candles) rather than specific length of time. Trend must be clearly defined, meaning that there is no question which may market is moving. Next, price movement must be gaining momentum, seemingly moving faster and faster. Eventually, one wants to see reversal candle, which preferably is the largest one in the series, or most recent history. The larger the trying to reverse, the higher the probability of real exhaustion taking place. 

That’s exactly what happened on Thursday with JPY pairs, best seen on hourly charts. Prices had been falling for some time, indicating downtrend. Eventually sell off picked up speed, for reasons which I’ll leave for others to sort out, culminating in a single candle of ridiculous size, especially considering relatively small time frame . This is how it looked like.

As the price started to break under recent lows, I took a short position here, with fairly large objective of 250 pips, expecting at least two days for this to happen, optimistically. Had absolutely no idea what was about to happen. Target was reached fast and then market collapse another almost 500 pips in one hour! Price started to reverse sharply, indicating probable blow out move. Once the candle closed, leaving size-able shadow behind, I went long looking for quick correction of 200 pips. It is obvious now that I was overly cautious, but it didn’t feel that way when things were unfolding.

Just how large was range for this one candle? In recent history, AUD-JPY fell this much only during the height of financial panic, in October 2008. And that was when Aussie was under pressure for weeks already and seemed like it became the proverbial “hot potato” – nobody wanted to hold it. Thursday price action was a perfect example of what “large” price bar is. 

Almost identical trade took place in CAD-JPY. Since I viewed CAD as a little stronger than AUD, target on the downside was smaller here, but larger on the corrective move.  In this cross hourly price range was absolutely impressive – larger than anything what happened in 2008.

Latest action produced hourly candle with a range of about 500 pips, much more that the 300 or so pips in October 2008, leaving no question that it is  “large”. With similar trades in GBP-JPY and EUR-JPY, panic moves in Yen proved to be very good, even if my trades were far away from perfect.

There are couple of things one should remember when trading blow out moves. They do not necessarily indicate longer term top/bottoms, or price extremes, but rather areas where price is likely to be corrected. Reactionary swings more than primary price action. This means that objectives should chosen accordingly maybe on a conservative side when comparing to the move causing it. Also, watching the tape provides additional clues about proximity of exhaustion point. How fast are quotes changing? What is the pip difference from quote to quote? Is there a “freeze” in price change at possible extreme point? These aspects are difficult to explain but can be learned through paying close attention to how action develops during times like these. Just like any strategy, this one can’t be learned overnight. But it’s worth giving a shot.

Mike K.