Check out this explosive trade set up…
I’ve just spotted a lovely trade setting up in the Yen/US Dollar market…
It uses an old technique to get us in, one of the first I was ever shown, but this still works a treat.
Today, I thought I’d walk you through how to use this particular set up yourself.
It’s a handy one to have in your arsenal if you can’t watch the screen because it uses the bigger time frames. You can use it on the daily charts (handy if you like to monitor things in the evening) and it also works very nicely on the 480min (8 hour) chart.
But don’t worry about having to follow the charts closely. You can just set an email or SMS alert with your broker.
That way, once you receive a message telling you the market is getting near the ‘action zone’, you just keep a casual eye on things until one of the bars closes in a particular way, giving you the signal to trade. It’s not like your chasing your tail on the quick-fire 5 minute chart with this!
So look, don’t tell anyone, but this setup was lifted straight out of the share-trader’s domain. And the beauty of it is because the 8 hour forex charts behave very similarly to the daily charts in the stock market – we can help ourselves to 3 times more opportunities with this than the stock traders themselves do.
We get to use the turbo-charged version!
Here’s what we’re looking at…
This is a ‘swing trading’ set up designed to get you in early on a developing trend and go looking for 2:1 or even 3:1 reward to risk trades.
It uses a basic 89 period exponential moving average as both a trade filter and part of the trading trigger mechanism that actually gets you into the trades.
(Please don’t worry about any technical sounding lingo. ‘Exponential’ just means a front-loaded moving average – it’s calculated to give a bias to the more recent price action, that’s all.)
And the reason this indicator can give you an edge is because it’s widely followed as a provider of support and resistance by the big players. You get a signpost pointed to where their volume is sitting in the market which you can then use to your advantage.
You’ll find the exponential moving average in all common charting packages – it’s sometimes called ‘EMA’ – and your chart will plot it all for you. You’ll end up with an undulating line on your chart like the one below:
Can you also see the blue blobs I’ve drawn over the areas where the market comes into contact with the 89 EMA and then either stalls or reverses?
That’s a key part of the technique, I’ll tell you about that next:
What we’re looking at is for the market to penetrate the 89EMA and then hold its ground on the new territory.
So for example, if the market was trading above the 89EMA but then pokes its way through to start trading below it, we’re then looking for the 89EMA to offer resistance and keep the price action contained to the down-side. Like it did here:
Part of our setup is to see the market recoil to touch (retest) the 89EMA line and then move away from it again aggressively as new selling volume hits the market.
I’ll zoom-in and swap over to candlestick charts now to give you a clearer view.
So here we are zoomed in on that GBP/USD example from above:
You can see the price action a bit clearer now… see how once it establishes below the 89EMA, the market pops up to probe the EMA from below?
It hardly manages to squeak through by a handful of pips before the sellers step in and dominate. And once you see that strong bearish red candle close, that’s your signal to sell and join the party:
Once you’re in the trade, put a stop loss in above the most recent highs – in this case it goes above the high of our red candlestick. You can then project your profit target downwards as a multiple of the distance between your entry and your stop loss. I suggest taking some profits once you’ve reached the 2:1 level and let the rest run on, aiming to close-out at 3:1.
You should also get into the habit of trailing your stop loss in closer behind you as the trade goes in your favour.
So that’s all there is to it really…
1. Watch for the market to penetrate the 89EMA
2. Wait for it to retest (touch) the 89EMA from the new side
3. Look out for a strong candle as the buyers/sellers step in to reveal their hand.
And then get yourself involved right alongside them!
So what about the JPY/USD trade I was telling you about?
Here’s the set-up:
First, let’s just be clear that there are no guarantees here. This is a strong set-up but it still doesn’t mean every single trade will work out for us… we’re always going to get some losing trades too. As a trader you must be prepared to accept that.
But I do like the look of this Yen trade… we had that steep rise beginning on 6th October. We had the stall as the 89EMA was hit. The market pushed through, retraced against the 89EMA and has just moved higher again with that strong green candle. It’s only just closed as we rolled over into Tuesday 15th October.
I’ve marked the x2 and x3 profit targets but there’s also an old resistance level smack in between them. It’s got to be a case of moving stop losses to breakeven (or better) as soon as that level is touched… maybe even getting out of the remaining position at that point instead of holding out for profit x3.
Remember, successful trading is all about playing the probabilities…
So let’s keep an eye on that Yen trade and see what we get.
Be Prepared: Market Moving Data Coming This Week (London Time – BST)
It’s all about trying to resolve the US debt ceiling/government shutdown debacle this week. On Thursday the US government must raise its $16.7 trillion borrowing limit so the country can pay its bills! And if it can’t… if the US defaults… what then? No one knows where we’ll go, but be prepared for dollar volatility!
Wednesday 16th October
09:30 UK Claimant Count (GBP)
09:30 UK Unemployment Rate (GBP)
10:00 EUR CPI (EUR)
19:00 US Beige Book (USD)
23:45 US FOMC Fisher speaks (USD)
Thursday 17th October
09:30 UK Retail Sales (GBP)
12:45 US FOMC Fisher speaks (USD)
13:30 US Building permits (USD)
13:30 US Jobless claims (USD)
15:00 US Philly Fed (USD)
Friday 18th October
20:40 US FOMC Dudley speaks (USD)
21:30 US FOMC Stein speaks (USD)
So I hope you found my ideas from today’s issue useful. If you get a spare 10 minutes – do a bit of manual back testing on the 89EMA idea, it can help you catch some really explosive moves in most of the major pairs.