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Applying the Proper Trading Principles to a Properly Trending Pair

Applying the Proper Trading Principles to a Properly Trending Pair

Richard Krivo, Trading Instructor


Student’s Question:

So I'm totally new to this and trying to see if I'm on track with my thinking.I'm looking at a 30min chart of USD/JPY. My picture is hard to see but the MACD line is just crossing over the signal line. Since this pair is in a down trend I would be selling at 82.680 which was the market price at that time, placing stop loss at 83.080 (just above the previous high) and take profit at 81.975 (right above the low).Am I on the right track here?Thanks!

Instructor’s Response:

You definitely have the right idea on theconceptbut I am concerned about the pair chosen for the trade.

On the 30 minute chart provided, we can see the pair has been moving to the upside.While the USDJPY is below the 200 SMA on the Daily and is in a modest downtrend on that chart overall(it also has been moving up since Feb 28), on most of the other time frame charts, 4 hour, 1 hour, etc., it has been moving strongly to the upside. On the 1 hour and the 30 minute for example we can see how price action is building higher highs and higher lows and has been trading above the 200 SMA for quite some time. The MACD has been building to the upside also.

Bottom line: I would not be shorting the pair at this time. I would be waiting for the pair to begin making lower highs and lower lows to show that the sellers are back in control.However, the manner in which you suggested trading the pair, right down to the stop and limit placement were right on target for a pair that is in a strong downtrend.I would suggest taking a look at the NZDCAD pair, which is in a strong downtrend, and apply the process that you outlined to that pair and I think you will see the difference.Step 1 in trading is to find thestrongest trending pairavailable and then apply the trading principles to that pair. The USDJPY currently is not a strongly trending pair.Conceptually, however, you have the right idea...good work.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.