This is going to be a breakdown of a trade set up for a position I am currently holding on the CAD/JPY FX Currency pair. If you don’t know what an FX currency is or what CAD/JPY stands for or even what a short trade is then I would recommend you go and visit babypips.com and do their simple Forex course. It will help you learn the basics. Let’s get stuck in to it.
The basic components of this trade are as follows:
- 100% Technical Analysis
- Pattern Trade – Wedge/Channel
- “Double Top” rejection of a resistance zone
- High Reward:Risk set up
As it stands, this is my second attempt at shorting the CAD/JPY FX currency pair this week with my first attempt being closed for 0 profit and 0 loss after failing to break the ascending bottom TL of my wedge/channel set up. As a rule, I tend to move my stop losses to my entry price once the trade has moved around 35 – 40pips into profit. This is mainly to protect my trading capital and I am of the opinion that if the price reverses from that point then that particular position is no longer valid.
Let’s look at the CAD/JPY 4hr price chart and I will explain my confluences for taking the 2 trades on this FX currency.
You may be thinking… “Why is this maniac trying to short CAD/JPY when its clearly in an uptrend and he has seen this with his trend lines?!” and you are perfectly correct in thinking like that but let me explain my theory and why I like going against the trend in certain circumstances like this.
Firstly, this style of entry produces a very high Reward:Risk ratio and that R:R ratio is the key to long term profitability. It allows you to ride out losses and still maintain profitability even if your win rate is no where near 100%. Secondly, I look at the individual waves being created as the trend as gone along and I will only take this style of trade if there is enough probability of me being able to eliminate my exposure on the trade before the next potential trend continuation point. I will show you what I mean by these now.
Reward:Risk Ratio = Number of pips to target profit/Number of pips to Stop Loss.
In the case of this trade my first entry had a R:R ratio of 11:1 with a final target profit at the 81.00 level and a reasonably tight 30pip SL. My second and current position has a R:R ratio of 15:1 with the same target profit at 81.00 and an even tighter stop loss. This is the beauty of this style of trade. Not only can you afford to be wrong multiple times and then win and make a decent profit but as the pattern continues, the R:R ratio increases. If you aim to remove exposure correctly as I will show you now, then actually you rarely take a realised loss on your attempts making it all the more profitable.
Removing Exposure – How to identify when this is going to be achievable before entering.
As I explained, I aim to move my SL to my entry price when price has moved around 35 – 40pips in profit. This is key when trading this style of entry because I need to make sure there is enough probability of this happening to be able to confidently take the trade because I am trading against the current trend and trying to predict the reversal to capitalise with an inflated R:R ratio. On the CAD/JPY chart i analysed the previous waves of the bullish trend and measured the distance from the current high that I was planning on shorting from to the trend line I had drawn connecting previous lows. You can see on the chart below that this distance was around 70pips for the first attempt at shorting tis FX currency pair. This meant there was a very good probability of me being able to move my SL to entry price and eliminating risk from the trade before price reached the trend line where it might reverse.
You can see the wave analysis, trend line and 1st attempt at shorting CAD/JPY on the chart below.
My first attempt at shorting CADJPY is marked on with the black arrow and it was on the close of that 4hr wick rejection candle at the 3rd touch of the ascending channel trend line. My stop loss was placed at 84.570 which is the same as the current position I have running on CADJPY. Price started to drop through the following day and into Tuesdays trading session which is when I moved my stop loss to entry price. Price continued to drop until it reached the bottom trend line where it proceeded to bounce and eventually take me out of the trade with no profit but more importantly, no loss.
I waited a few hours for the FX currency to calm down and came back to the charts on Wednesday evening to re-assess the situation. I know from backtesting and previous trades that this strategy does often lead to a few breakeven attempts before being successful so I watched what price did next. This is where things get good! Price then failed to break the 84.50 zone again on the lower timeframes and the 4hr candle closed as a bearish wick rejection candle. This formed a double top rejection of that zone and with price now being slightly higher than when I shorted previously, the R:R ratio was now even greater at 15:1.
I entered short for a second time on Wednesday evening (27th Feb 2019) with a 22 pip stop loss and the same target profit at 81.00. I will manage this trade as I always do and move my stop loss to entry price when it has moved 45 pips into profit.
I have posted this trade set up on my trading view profile so you can follow the trade as it progresses. Please click on the link below to view it.