*Very simple trend continuation trade on the 4hr timeframe*
Im going to use this blog post to recap a trade I entered last week that didn’t end up going to plan. However, thanks to risk management and adapting to the price action that I was seeing, I was able to escape from a losing trade.
This trade on the USDJPY FX currency pair is a very simple trend continuation trade that relies on only a few key points of analysis to enter. However, the success of the risk management also relied on having an account with a broker that executes your market orders accurately and efficiently with as small spread as possible.
I know that there are a lot of issues with brokers in the retail trading market that offer huge spreads and often give slippage when executing traders orders. These will of course have an effect on your overall profitability as a trader. I personally spent over 2 weeks researching and comparing various brokers to make sure I found the best on for me which turned out to be IC Markets.
Their spreads are second to none and their “True ECN” service offers spreads as little as 0.0 net on some FX currency pairs which is fantastic. This means the actual costs of your trading are reduced massively.
Anyway, let’s get back to the trade breakdown and look at the daily timeframe chart on USDJPY to see why I was looking for a potential long position entry. As always, you can track the progress of this trade live on the TradingView platform which is the charting software I use for all of my technical analysis.
The daily timeframe chart has been in a nice consistent down trend since it broke the daily 50 ema back in the beginning of May 2019. I took one short trade on USDJPY in this time but I don’t really like shorting it for any extended period of time because of the large negative swap fees that are applied to short positions. What I was waiting for was the break of this bearish trend and the confirmation to take the first long trade entry when it appeared.
When the bearish trendline was finally broken and retested earlier this month it was then put on my watchlist. I wasn’t willing to take this break and retest long entry because price had not made a higher high and the previous highs (marked on the chart) were not breached. I was waiting for price to break above these highs and the resistance zone at 108.800 before I would enter any long positions. Price eventually did this a few days later.
Let’s now go to the 4hr chart so I can explain what I was looking for in regards to an accurate entry with decent reward:risk ratio.
At the point of entry, the 4hr timeframe chart was now definitely looking bullish. I have marked on the higher highs and higher lows with yellow circles so you can easily see the prevailing trend that I was looking to buy in to with the hope of it continuing.
After the latest higher high and the previous daily highs being breached, I was looking to go long on the next pullback. There was also the nice liquidity support zone at around 107.800 that was potentially going to act as a great support for price.
I entered a long position on the bullish 4hr candle closure that rejected the 0.786 fibonacci retracement level and the support zone. This was a good sign that a new higher low would be made at this level and the bullish trend would continue.
As always, I recommend to keep your stop losses out of the way of any support/resistance zones just incase there are further “tests” of the zone. A 35 pip stop loss was enough for this trade on USDJPY. My target profit was set at the 110.00 key psychological level which was around the fibonacci -0.618 extension level.
If you haven’t used fibonacci retracement and extension levels before then I recommend you read up on them. They are fantastic for helping you to more accurately predict the futures waves of trends.
Before I continue, this trade breakdown is different to my normal ones because it actually ended up with zero profit and zero loss. I want to explain to you my management of the trade and why I remove exposure when I do so you can perhaps avoid unnecessary losses in the future.
I have previously spoken about how I move my positions to net risk free when they are comfortably in profit and this trade on USDJPY was no exception. Let’s look at how the trade started off.
The bullish momentum came back in to USDJPY very quickly after I entered the trade with not further tests of the support zone occurring. This is great news and price was soon 45 pips in to profit (+1.3R). It is at this point I saw the next 2 4hr candles close with signs of momentum slowing. You can see this with the wicks occurring but this was to be expected as the US trading session was ending and it was close to 10pm at night (GMT).
I therefore moved my stop loss order to my entry price level to remove all exposure from the trade. In my opinion, with these types of trades they should almost continue straight towards previous highs and then new higher highs without any significant drops back to entry price. Once the initial higher low is made and support zone confirmed, there should be no more retests of it. If there is then the trend continuation trade isn’t valid anymore because price is now beginning to chop sideways. If this happens I would rather have no exposure and no loss and be able to look for better trade opportunities elsewhere instead of sitting and waiting for what might become.
The chart above shows what happened over night and through the asian trading session that followed. There was a swift sell off on USDJPY and price broke back down through the 4hr 50 ema and then went on to trigger my stop loss order at my trade entry price.
Ideally if this trend continuation trade was going to work it would have perhaps pulled back slightly to the 4hr 50 ema / 1hr 50 ema and then bounce and continue on to make the new higher highs I predicted. Instead, price appeared to make a lower high on the 4hr chart and drop back down to the original support zone. I was therefore happy to be out of this long position now with no risk.
The reason why I say this is because if you were to look at the chart above with none of my previous analysis on it, would you enter a long position? I wouldn’t.
It is important to be flexible and move/change your bias with the changes in price that you are seeing evolve on the charts. If the trend becomes chop or if a support zone is breached then take a step back and have a fresh look at the chart. If your original analysis is becoming questionable then get rid of that exposure!
A missed trade is much better than a loss in my opinion.
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