The purest form to interpret the price action, market geometry sits at the base of technical analysis. It uses consolidation areas from the past as well as past price behavior to project high-probability levels where the market will react.
Trading with Market Geometry
Trading with market geometry has much to do with interpreting support and resistance levels on the left side of the chart and projecting them on the right. As it deals with no indicators whatsoever, often it is said that using market geometry is the art of interpreting a naked chart.
In today’s world where trading platforms offer various technical indicators, and many theories exist, using market geometry is like going back in time when technical analysis started.
Yet, the power of charting with market geometry principles remains valid on today’s currency market too. The only way to prove it is to start with a naked chart and see where it leads.
Market Geometry Principles in Today’s FX Arena
This is the USDJPY weekly chart. It shows the price action in the last decade. Keep in mind that when it comes to market geometry and support and resistance, the higher the timeframe, the stronger the levels are.
The first thing that strikes the technical eye is the possible double top the pair formed around 125 level, and then a rejection towards an area that acted as a pivot.
From left to right, the price fell with no significant bounce until it found some support underway. Eventually, the support broke and the bearish trend resumes.
However, bulls managed to break the series of lower lows and lower highs characteristic to a bearish trend. It was when the Bank of Japan announced an unprecedented Quantitative Easing (buying JGB’s – Japanese Government Bonds) program, that made the JPY fell across the Forex dashboard, sending the USDJPY higher.
But, on its rise, it hesitated at the same area traders using market geometry already knew from the past. The resistance was so strong; it kept the bulls at bay for about six months.
Yet, the market formed a pennant, which is a continuation pattern. The price action during a pennant’s formation doesn’t allow any pullback to break the previous higher low.
Just like it was the case here, the price action indicating that the resistance will eventually give way and turn into support. After support held, the next logical step was for the market to go for the previous highs, putting in place the possible double top. But, is it a double top?
For this to be a double top, the market must reverse well below the 77 level that followed the 2008 financial crisis. To reach that level, it must break significant support, not to mention that it recently bounced from a confluence area.
A confluence area is a place where both dynamic (support that follows the price action) and horizontal support forms, increasing the chances that the price will bounce from it. Indeed, it jumped, and now the pressure seems to build on the upside.
Remember that we started from a naked chart, and interpret it using simple market geometry principles.
The beauty of trading with a naked chart is that the fundamental bias doesn’t influence the trading decision. When the trader notices a pennant or a confluence area, no matter the economic news, if the price can’t break it, the easiest way to make a profit is to stay with the market geometry.