TradeProfits

Daily Lesson # 3

Posted on 27. Feb, 2010 by Jakob in How To, Random Noise, forex signals

Click this picture to see a chart of the USD/JPY pair (Weekly timeframe).

First of all we can clearly see that this pair is in a downtrend, and since November 22nd has started to form a triangle pattern which is identified by the two trend lines. This wedge-shaped pattern is known to produce strong breakouts and this is exactly what happened here on February 25th. First of all, the most important part here, is that we want to trade in the direction of the trend, unless there have been fundamental news which justifies a change in the trend.

Now let’s zoom in and take a look at the 4-hour timeframe.

The first 4-hour candle which closes just below the supporting trend line would be a perfect level to enter on a short trade. I would set my initial target at 88.57 which would yield a total of 110 pips of profit. At 88.57 it seems likely to bounce back, due to the emotional candle we had back in the beginning of February. I would have placed a stop loss just around 89.84 simply because I would not want to see the pair go back into the wedge-pattern. Hence we would have a stop loss of some 17 pips. This gives us a very good risk:reward ratio.

Now if we zoom in and look at the 1-hour timeframe, it gets even better.

After the initial break of the support level, the pair retraces right back and gives us confirmation; support is now resistance, and the break was not a fakeout. In addition to this, the small candle which touches the resistance level, is a reversal pattern in itself. Obviously it is easier to find these setups in retrospect, but this one should have been a no-brainer.

Every day brings a new lesson in forex trading. If you want to get a head start and read more about my trading strategies, you should grab a copy of my new book Forex Hacking.