*Basic Trendline Break Trade With Advanced Trading Scaling In!*
This blog post is another post trade breakdown where I will talk you through my analysis, execution and management of a short trade on the Euro vs US dollar FX currency pair.
As always, you can track the execution and management of this trade live on my TradingView profile by clicking on the link below:
Let’s get in to the analysis and look first at the EURUSD 4 hour timeframe chart to see why I was interested in shorting the FX pair.
Before I go further, it is probably good to note that this trade would be considered a “counter trend” trade if you are looking at the higher timeframes such as the daily or weekly. As it is counter trend, the potential profit can quite easily be limited and therefore I am managing this trade on the 1 hour timeframe and being fairly aggressive with my stop losses and scaling in positions.
The chart above shows the 4hr timeframe chart before I entered an initial short position on the EURUSD currency pair. The clear double top and lack of a higher high being made (bullish trend continuing) said to me that in the near time, EURUSD was set to drop. The large bearish 4hr momentum candle that closed was a good indicator of this because it showed other sellers in the markets were also thinking the same and hence price was moving down sharply from the 1.135 resistance zone.
Let’s look at the 1hr timeframe chart to see my initial short position entry.
As you can see on the chart above, price broke down through the 1hr bullish trendline and the 1hr 50 ema which is a strong sign that the current trend on that chart is going to reverse. The 2 bearish wick candles that formed outside the TL added to my bearish bias.
In terms of profit targets and stop loss placement, i kept things fairly simple with a stop loss above the current double top and resistance zone. Profit target 1 was set at 1.12 key level which was also the daily 0.618 Fibonacci Retracement level.
This ties back in with what I mentioned at the beginning of this blog post. This was a counter trend trade because if you were to look at the daily timeframe chart, price did actually make a daily higher high last week and technically broke up out of a bearish trendline on the higher timeframes. You can see this on the chart below and I have the fib levels marked on for you too.
The daily trend technically being bullish means the downside of this short trade could be limited. That is not a certain though. Price does “fake out” of trendlines and go on to continue its previous trend after tricking traders in to thinking it has reversed. Therefore, a daily lower high forming may not take place and EURUSD could go on to make new lower lows through the 1.11200 level.
Let’s look at how the original short position played out.
Price proceeded to drop after the initial trendline and 1hr 50 ema break. The bearish momentum candle on the 4hr timeframe turned out to be a clear indication that seller pressure had entered the market and this was proven with the impulsive move to the downside.
I think the 1.12 daily price level is a good place to take some profits because of that higher timeframe bullish trend breakout.
Going for more and scaling in:
At this point, you may have noticed I have shown you the original short position on the 1hr timeframe chart which is not a timeframe I usually place a lot of emphasis on being a swing trader. This is because I used the 1 hour chart to scale in to this trade multiple times in an effort to further capitalise on the bearish momentum present.
I have previously explained this advanced trading technique in a previous blog post which you can find via the link below. I highly recommend you check it out as it could take your trading to a whole new level.
My first scale in entry was after price made the initial bearish momentum move from breaking the TL and 1hr 50 ema. Price then began to consolidate and form a nice bearish flag continuation pattern before continuing onwards. I have this scale in position marked on the chart below with the entry shown by the 2nd black arrow.
Flag continuation patterns are great for capitalising on momentum int he markets and they appear a lot more often than you may think. They are also useful on all timeframes so it doesn’t matter if you are a swing trader or day trader, I believe you could all benefit from learning how to spot and trade them.
My second scale in entry on the EURUSD FX currency pair was on the next 1hr rejection of the 1hr 50 ema which I was using a s a dynamic resistance for price. Just like a support or resistance zone, once an ema is broken from above and price is below it then becomes a resistance. It is good to keep this in mind and depending on the timeframes you are trading, you can use ema bounces as an effective way of entering trade positions. EURUSD is a great example of how price reacts to an ema as a resistance. This 2nd scale in position is marked on the chart with the 3rd black arrow.
Each time I am scaling in I am keeping my profit target set at the same level which is 1.12. This tends to further exponentially increase returns from a trade in relation to R being risk. This is because scale in positions like those shown above have smaller stop losses than my normal position entries.
My 3rd and final scale in entry was on another bounce off of the 1hr 50 ema resistance. It is important for you to realise that price never moves in a straight line for ever and will make pullbacks of various sizes before continuing on its path. This is why the 50 ema bounce strategy can work very well on lower timeframes like the 1hr because you get frequent pullbacks and bounces to trade.
This scale in entry is marked by the 4th black arrow and as you can see, the 1hr 50 ema bounce proved to be very effective on this bearish move on EURUSD.
By scaling in to a move like this, you can quite easily turn a very respectable trade with an R:R of 4:1 in to a mega trade with a return of over 14.5R. This is a large exponential increase on returns and all whilst maintaining your original exposure values.
This is because you should only scale in with a new entry once the existing positions are net risk free with a stop loss order at the entry price to eliminate any losses. I explain these risk management methods in more detail in a previous blog post which you can find via the link below.
So there we have it. That is my post trade breakdown of the EURO vs US Dollar currency pair on its recent bearish move down to 1.12. Thanks for reading and I hope you all learn something from this blog post.
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DISCLAIMER: None of the information posted on this site is to be considered investment/financial advice. Trading is high risk and you should only trade with money you can afford to lose.