USD/JPY - Piercing Pattern; a Buy on a Dip Trading Plan

The USD/JPY has been shot out of a cannon since touching the 76.00 handle. As a new week starts, the market opens higher than Friday’s close, tagging 81.57 before sliding sharply down toward 80.00. If the daily candle closes around here, we have what’s called a piercing pattern, often assessed as a warning of reversal, or at least a correction. This may present the first significant correction during the current bull run.

If the market is to remain bullish, which is my preferred scenario, then we should be making a “buy on a dip” trade plan. Let’s start with assessing possible 1) support 2) risk 3) reward.

1st Entry and initial R/R: The first possible support is the 79.45-79.50 area (previous resistance pivot and 38.2% retracement of the 76.01-81.57 swing. Support here can confirm a bullish continuation, but a break does not invalidate. In fact I think a deep correction to 61.8% retracement at 78.15 provide the dip is not in panic mode, can still be within the bullish outlook. A stop should really be under 78.00, let’s say 77.65. From 79.50 down to 77.65 is a hefty risk of 185 pips. Initial target should be the 81.50-81.70 area, giving this a reward to risk of about 200 pips to 185 pips, basically 1:1. There is too much risk at 79.50.

2nd Entry and shifted R/R: If a second entry is planned at 78.30, the average entry can be 78.90. Now, the risk is 125 pips, and reward is 270, making reward to risk slightly better than 2:1.

2nd Target: While the current highs and the 81.70 (61.8% retracement seen in the weekly) creates the first target zone. A more aggressive outlook can be seen toward the 84.50-85.20 resistance pivot zone. This makes the possible reward from 78.90 500+ pips. At 500 pips, the reward to risk is 4:1.