*Lower timeframe aggressive trade entry for maximum reward:risk”
It’s nearly the end of the month and Q2 so I thought I would finish with another post trade breakdown of a recent FX currency short trade I took this month. I am hoping that you find these trade breakdown posts insightful so you can then see what I am looking for when entering certain types of trades and you can potentially use this when building your own trading strategies.
I didn’t actually post this trade set up live on the TradingView platform but as always, I did use TradingView for my pre trade technical analysis and trade management including entering a hedge position and second scale in position. If you are looking for a new charting software then I highly reccomend you check it out via the link below.
Let’s start with a quick overview of the key details of this trade and then I will show you each piece of the analysis on the multiple timeframe charts.
- Instrument: USDCAD FX currency pair
- Direction: Short (sell)
- Timeframes used: Daily and 1 hour
- Original entry criteria: Multiple bullish trendlines broken, 1 hour flag continuation pattern.
- Number of positions: 2 short positions, 1 long position (hedge).
- Total number of pips gained: 376 pips
This trade is a classic example of why you should use multiple timeframe analysis to make sure you are on the side of the higher timeframe momentum. Not only does it allow you to go for more aggressive entries with greater confidence but it also helps increase the potential return of the trade. The chart below shows the daily timeframe chart and why I was looking to short the USDCAD currency pair.
The value of the US dollar vs the Canadian dollar has been steadily climbing since the beginning of the year. I believe this is partly due to the value of US oil dropping from $75 a barrel in November 2018 to nearly $40 a barrel at its recent lows. As I have explained previously, the value of the Canadian dollar is very closely linked to the price of US oil. I have a bullish trendline joining the prominent higher lows of the recent bullish trend and this has held strong with multiple rejections and bounces until the beginning of June where it was then broken with a strong bearish momentum daily candle. Around this time, price also broke through the daily 50ema which had been acting as a dynamic support zone for quite some time. These 2 reasons combined are what caught my attention and got USDCAD put on my trade watchlist.
I am not a fan of simple selling on the breakout of a trendline or support/resistance zone because quite often you see “fake outs” that trap the lesser experienced traders in to losing positions. I much prefer to wait for a retest of the broken trendline or at least a lower high (or higher low if it’s a bullish breakout) before entering any positions.
If we look closer at the daily timeframe chart you can see this happen. I have marked on the lower high and retest of the bullish trendline and daily 50ema with the yellow circle.
Once I had the higher timeframe bearish bias, I dropped down to the lower timeframes to find a potential trade entry with a greater reward:risk ratio. One could simply enter short on the retest of the daily trendline with a stop loss above the daily lower high and a target profit of a new daily lower low but, this would only give a R:R ratio of around 3:1 which is not fantastic considering the trade would involve a drop of over 220 pips. Instead, I looked at the 1hr chart for a better entry.
After the large bearish daily candle close that was the perfect retest of the daily trendline, I looked at the 1hr timeframe chart for possible entries. As you can see on the chart above, there was a nice bullish 1hr counter trendline forming and the bearish moment had cleanly broken that and the 1hr 50ema. This was a good sign that more downside was to come.
If you are not familiar with flag and wedge continuation patterns then I suggest you look in to them because they are really good for lower timeframe, aggressive trade entries with large reward:risk ratios. I have marked on the consolidation that formed after the initial sell off and this “pause” in the markets is, more often than not, a good sign of the momentum continuing soon. This was my initial short position entry.
I entered short after the 9am candle close on the 19th June. This was the 8th hour of sideways movement so I was confident that price would soon begin its next momentum move. The benefit of this style of entry is that you only need a very small stop loss to keep you out of the consolidation and this then inflates the reward:risk ratio of the trade. For this short position on USDCAD, a 20 pip stop loss was enough to stay outside of the consolidation range and above the 1hr 50ema which had become a new dynamic resistance after being broken.
If you look at the chart above, you will notice I used the fibonacci retracement tool to help with potential areas to take profit. This is applied using the higher timeframe swing high and swing low points of the daily chart and that is why the original positions shows a potential return of more than 11R if price makes its way to the -0.27 fibonacci extension level to create a new lower low.
Again, this is another benefit of using the higher timeframe momentum but entering on the lower timeframe to reduce the size of your stop loss and increase R:R.
Let’s look at how this first short position played out.
Bearish momentum did come back in to the market, briefly after the 8 hours of consolidation had taken place. Price then snapped downwards with a large bearish momentum candle before continuing, almost uninterrupted, down to just shy of the target profit zone 1. This is not a normal occurrence but sometimes you will enter trades that just go straight to your target with little to no pullbacks in-between. Take them when you can and enjoy the moment.
If you look carefully at the chart above, you can see that price very nearly reached my intended target of 1.31500 but it bounced around 3 pips short of the level. Price then began to make a wedge consolidation pattern which I have marked on the chart. Just like my original entry, this is a continuation pattern and I was confident that with the higher timeframe bearish bias, price would break to the downside at some point.
Position 2 – “The Hedge”
Before I continue, I would like to say that hedging existing positions is a fantastic way of locking in profit in a trending market. It can also be used to increase your returns by trading the smaller trend pullbacks whilst maintaining net zero exposure. However… hedging can also quite easily stop your profitable trade dead in its tracks if you hedge at the wrong time. I would advise for you to research, backtest and practice practice practice hedging before you attempt it on the live markets.
The reason for me entering this long position to hedge my existing short position and lock in profit is the fact that price broke out of the wedge continuation pattern but proceeded to bounce from the intraday support that had formed at 1.31550. This is the same support zone that price bounced from just shy of my target profit.
Just like with the original entry and the daily trendline, I prefer to wait for a retest of a broken TL or pattern before entering a position. Therefore I was not willing to scale in on this short momentum until price pulled back to the broken wedge trendline. This hedge position still had a relatively decent R:R with a stop loss below the wicks of the current candles at around 25 pips and an initial target of the broken wedge trendline retest which was circa 35 pips away.
Price proceeded to bounce from the intraday support at 1.31550 and go to retest the wedge trendline and the 1hr 50ema which had been acting as a very good resistance over the past 2 days. If you look at the chart above, you can see price testing and rejecting the 1hr 50ema on 3 separate occasions. Some people use this as a trade entry and trade the 50ema bounces.
By entering this hedge position what I did was profit on a 34 pip pullback against the direction of my larger timeframe short position. Therefore when the floating profit of my original position dipped by 34 pips, the hedge position gained 34 pips. By closing the trade at the trend line retest I locked in an extra 1.36R and protected my original profit from the short position.
Position 3 – “The scale in”
Much like the original short position entry, this scale in position was based on the premise of utilising a pause in momentum before it continues. The wedge pattern is a fantastic example of when price consolidates after a big momentum move and the nature of its shape “squeezing” price to a point where it has to break out is a great opportunity to enter trades.
My scale in short position was entered after the break and retest of this wedge which also coincided with a perfect rejection of the 1hr 50ema. As I explained before, the 1hr 50ema can often act as a great dynamic resistance for price and selling on the rejections can be profitable if done correctly. For extra confidence, I applied the fibonacci retracement tool to the previous highs and lows on the 1hr timeframe to find potential areas of resistance and the 0.786 level aligned with the trendline and 1hr 50ema. This gave this zone a very strong probability of holding strong and price continuing to drop from there.
A tight stop loss of 25 pips is all that was needed to keep it above the wick rejection candles and away from any stop loss hunting. This then allowed me to aim for a return of over 3R if price dropped down to make new lower lows at one of the fib extension levels.
All positions closed:
I finally closed both positions upon the little 1hr rejection of the fib 0.618 extension level that was the target for the scale in entry. This was actually 33 pips lower than my original target for my first position entry so I managed to gain extra profit out of that position too.
The chart above shows all 3 positions I entered on this recent bearish move on the USDCAD FX currency pair. Entries are marked using the black arrows and hopefully you can use this as an example of how to trade with momentum and turn quite aggressive entries in to great trades.
Position 1 (short) – TL break, flag continuation = 13R
Position 2 (long) – Double bottom, hedged trade = 1.36R
Position 3 (short) – Wedge continuation, TL break & retest, 1hr 50ema bounce = 3.28R
Total = 17.64R
As always, I keep it simple. All I used in my analysis was 4 trendlines, the 50ema and the fibonacci retracement tool. The rest of the analysis came from just looking at what price was doing and spotting patterns and pauses in between momentum.
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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.