*A complex carry trade with multiple timeframe analysis and lower timeframe entry*
This is a blog post to show you my pre trade technical analysis for a long trade (multiple positions) I entered on the USDJPY FX currency pair. This trade encorporates a lot of simple technical analysis and multiple timeframe analysis to produce a seriously accurate and high reward:risk entry.
This trade also benefits from being a carry trade which means I am able to comfortably hold the trade for as long as it is as profitable. With positive swap fees, I get paid a small fee, from my broker, each day to stay long USD and short JPY.
The definition of a carry trade is borrowing at a low interest rate and using the capital to invest in an asset with a higher rate of return. In regards to the FX currency markets, a carry trade is when you borrow a currency which pays low interest rates and buy a currency with high interests rates.
Borrowing a currency is simple when trading FX currency pairs. Using this USDJPY long trade as an example, I am borrowing and selling Yen with a central bank interest rate of -0.1% and buying US dollars with a central bank rate of 2.0% to 2.25%. Yes, you read that correct, Japan has negative interest rates and that is why USDJPY is one of the most attractive FX carry trades with a net positive interest rate differential of +2.1% to 2.35%.
What this means is that I get paid up to 2.1% per year to hold all USDJPY long positions and this is settled daily with my broker. Carry trades can be used as an excellent way to earn a low risk profit so long as the currencies involved stay fairly stable. However, if the higher interest rate currency appreciates in value then the carry trade becomes even more profitable and this is what I am looking to do with this USDJPY trade example.
Quick Tip: If you are not getting paid positive swap fees from your broker then it might be time to switch. Click on the link below to check out a low cost, fully regulated broker.
Now let’s look at the USDJPY FX currency pair and I will talk you through why I am currently holding multiple long positions.
As always, I start with the higher timeframe chart and work down. In this example I started with the weekly timeframe chart to identify my support/resistance zones and key price levels. Sometimes I use the daily or monthly timeframe charts but it depends on what I am seeing at the time. If in doubt, go to the monthly and work your way down to the 1hr to cover everything and be safe.
The weekly chart for USDJPY is pretty simple to digest but the large wick candle caused by the 2019 FX currency flash crash could confuse a lot of you. I am personally now just ignoring the shape of the candle and using the lows as a case for the established support at the 105.00 price zone. As you can see, this zone has held strong for 2 tests and was where price finally fond support during the vicious sell off in the January 2019 crash.
I have also used the weekly chart to plot the fibonacci retracement tool on this higher timeframe trend to predict the potential reversal and support levels. Theoretically, this long trade is a counter trend trade against the bearish weekly trend and therefore I am using the -0.27 weekly fib extension level as the support instead of the usual 0.618 or 0.786 retracement levels. Although this is counter trend, there is a nice support zone at 105.00 and therefore it is a support bounce trade on the higher timeframes.
Let’s look at the 4hr timeframe chart next.
I used the 4hr timeframe chart to look for signs of deceleration at this 105.00 support zone. It is very risky entering a long trade when price is dropping with strong bearish momentum so I highly recommend doing what I did here.
Look for wicks forming at the lows of candles which indicates signs of buyers supporting price and stopping it from moving lower. Another good sign is the bearish price movement beginning to flatten out and create a triangle.
As you can see on the chart above, multiple candlesticks closed with wicks rejecting the 105.00 support zone showing a lot of buying pressure there. It is also very clear to see the bearish momentum slowing and price flattening out.
The trendline shown on this chart is the 1hr bearish trendline that was broken and I will explain this in more detail next.
Important: Remember… support and resistance is very rarely found at exact price levels and instead act as zones. This is why I have the the 20 pip zone marked by the coloured zone as this is where reversals might occur, either slightly above or below 105.00 and not exactly there.
If you want to learn more about support and resistance zones then click on the following links to read my previous blog posts on the topic.
The final piece in the technical analysis puzzle, before I enter a trade, is to check the 1hr timeframe. I do this to try and get the most accurate entry possible and this therefore increases the potential return of the trade and profitability in the long term.
I have marked the existing bearish trend on the chart above and used a simple trendline joining the lower highs. After price initial rejected the 105.00 support zone it then went on to break the bearish trendline and then made a very close (but technically correct) higher high. This therefore meant that this lower timeframe trend was reversed and I was happy to look to enter my first long position on the USDJPY FX currency pair.
The break and retest of the bearish TL and 105.00 support zone along with the higher low that then formed was the perfect entry signal.
Why look at some many timeframes?
The reason I looked at so many timeframes before entering a position on the 1hr is because of the longer term potential. I did not want to enter a counter trend trade not he 1hr timeframe if I was trading agains the 4hr, daily and weekly timeframes. It is possible for each timeframe to show a different prevailing trend and if you don’t try to trade with them all in alignment then your potential profit and success will be limited.
By making sure the weekly price chart was at a reversal zone and the 4hr chart was showing signs of bearish momentum slowing, I knew my 1hr trend reversal trade would have a greater chance of success and chance of a bigger return.
Profit targets and risk management:
I have used the daily timeframe chart to show you the current higher timeframe bearish trend that is present. I am therefore being fairly conservative with my ambitions for my long positions and will look to take profit at the 108.00 region. This is where the current bearish trendline resides on the daily/weekly timeframe along with the 0.618 fibonacci retracement level.
As price has made lower highs and lower lows on the higher timeframes, the probability suggest another new lower low will be made.
Stop loss placement was very simple and my SL order was placed 15 pips below the 105.00 support zone. This allowed for any further retests and rejections of the zone to occur and not trigger my stop loss.
Capitalising on momentum:
I am a huge fan of capitalising on current momentum and adding to trades if the markets show a new high reward:risk entry and I am bale to enter more positions whilst maintaining my initial levels of exposure.
This occurred on USDJPY just over 24hrs after I entered my initial long position. I had moved my stop loss to entry price for my first position and therefore removed all exposure from the trade. I then entered long on the next higher low (trend continuation) and rejections of the lower timeframe 0.618 fib retracement level.
Both of my long position entries can be seen on the chart below along with where price is currently residing.
As you can see, price is steadily climbing northward towards my target level of 108.00 and both positions are now risk free with exposure removed.
I am more than happy to hold these positions for as long as it takes to reach this target and so long as the trends remain bullish. This is because of the positive swap fees that are being paid daily.
So there we have it, a rather detailed trade breakdown and I have tried to teach you something new that not many new traders know… the carry trade!
As I mentioned earlier in the blog post, if your broker doesn’t pay you positive swap fees on USDJPY to other positive carry FX pairs then I would recommend swapping to a broker that does. At the end of the day it all helps to increase your profitability!
My broker can be found by clicking on the link below 🙂
I will keep you updated on the progress of my USDJPY long positions and you can see updates posted daily on my instagram stories by clicking here.
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.