Trade Example – EUR/JPY

Filed under: Learn Forex Trading |

 

I have just spent quite a bit of time looking at a trade setup on the EUR/JPY pair, which for those of you that don’t know is the exchange rate between the euro and the Japanese yen.

 

Figure 1.

To begin with, take a good look at Figure 1. This is the daily chart for this pair, and what it shows is that the pair is in a very powerful bull trend. Therefore, I had been on the lookout for any price action signals that might confirm this bullish momentum. The 8-day exponential moving average is crossed well above the 21-day exponential moving average, and it has been for a long time. The pair is also making new highs, which is all very bullish.

 

Figure 2.

Now, take a look at Figure 2. This is the 4-hour chart for the same EUR/JPY pair. What you will see here is that the pair is still very bullish on the intraday charts, and that it is making new highs. A bullish candle has decisively broken through the previous high, and more importantly, it has closed above the previous high. When looking at all of this data, I felt that this was enough for me to initiate a long trade at a 50% retracement of the bullish candle, with a stop loss placed just a few pips below the low of the bullish candle, and a target of two times my risk. However (and this is a significant ‘however’!), I did one last check with the RSI indicator, to check that there were no divergences present (see the bottom of Figure 2). See how the RSI indicator is moving lower but price is moving higher? This is what we call a ‘divergence’ and it signals that the market is losing steam and momentum. For this reason, I decided to opt out of this trade. We shall see whether this was the right decision, or not, over the next few hours…

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