Trader education: How to use technical levels to manage risk and reward
Traders can manage risk by using technical levels to define stop losses and target rewards, risking small amounts for larger gains.
USDJPY is consolidating in a bullish pennant after a 500-pip rally from 152.93. A break above 157.53-157.70 would confirm continuation toward 158.04.
A pennant is a continuation pattern in technical analysis that typically appears after a strong directional price movement.
The initial rapid move is often referred to as the flagpole. Following that sharp move, the market enters a pause as buying and selling forces compete. Prices start forming lower highs and higher lows, drawing two converging trendlines that form a small pennant shape.
This contraction indicates the market is gathering energy. During this consolidation, neither side gains full control. As the two trendlines converge, the price has less room to move, and eventually a breakout occurs.
Pennants often break in the same direction as the prior move. Still, traders should not automatically expect the continuation. The breakout, along with the price staying beyond the pattern, provides the confirmation for the next directional move.
USDJPY's flagpole started near the September low at around 152.93. From that level, the pair rallied sharply, ultimately hitting the 158.04 zone.
That advance amounted to over 500 pips, clearly establishing the bullish momentum from the start.
After reaching that peak, the currency pair corrected to 156.65 and then bounced. Since that bounce, prices have recorded a sequence of lower highs and higher lows. These converging levels have produced the pennant formation.
The consolidation is thus occurring after a robust upward move. This gives the pattern a bullish lean, but buyers still need to do more.
For buyers to take firmer control, the price must break above the pennant's downward-sloping upper trendline. That resistance now sits around the 157.53β157.70 zone, though the exact trendline level will decline gradually over time.
A break alone is not enough. Traders also need to see the price hold above the trendline. A brief push above followed by a return inside the pennant would signal a potential false breakout.
Should buyers manage to break and sustain above the upper boundary, the subsequent targets are:
Clearing 158.04 would be especially significant, as it would push the price above the flagpole's peak and confirm that buyers are extending the broader rally.
The bullish scenario would be undermined if USDJPY breaks down through the pennant's rising lower trendline.
The initial downside level to monitor is around 156.92, with stronger support located in the cluster:
The 156.65β156.77 zone holds particular importance. It combines the rising 100-hour moving average, the 50% retracement, and the lower boundary of the recent consolidation. A sustained move beneath that cluster would indicate the pennant has failed and sellers are regaining control.
A pennant provides traders with a visual depiction of a market compressing after a strong move. The formation indicates where the next decisive action may occur but does not assure the result.
For USDJPY, the prior rally gives buyers the edge. A break above the upper trendline would pave the way for another push to 158.04, then 158.55. On the other hand, a break below the lower trendline, particularly beneath 156.65β156.77, would signal that the anticipated bullish continuation is not materializing.
The price is nearing the apex of the pennant. Watch for the breakout, and then see if the market remains outside the pattern. That confirmation will help decide whether buyers resume the trend or sellers transform the consolidation into a deeper pullback.
Share to
Disclaimer: this article comes from third-party media and is provided for reference only. It does not constitute investment advice. Crypto and other financial products carry significant price volatility risk, so please make your own decisions carefully.
Traders can manage risk by using technical levels to define stop losses and target rewards, risking small amounts for larger gains.
USDCAD gained about 320 pips from 1.3760 to 1.4080, testing a key resistance level.
Euro slid to its lowest since July as Iran deal hopes faded, while WTI rose and the dollar firmed.
ANZ and Credit Agricole see near-term dollar support from rate repricing, but caution that upside may be capped.