Trade Example – GBP/JPY (Change of Polarity)

Filed under: Learn Forex Trading |

I have a trade example for you today which is a great example of something called a ‘change of polarity’, which I will explain in due course. The example comes once again on the GBP/JPY currency pairing (the exchange rate between the British pound and the Japanese yen), as this is the pair that I am currently testing on Forex Tester.

 

Figure 1.

Figure 1.

To begin with, take a look at Figure 1. This is the daily chart for the GBP/JPY pair. What you can see is that the market is bearish, with the 8-day exponential moving average crossed below the 21-day exponential moving average, and the pair moving down from left to right. I have also marked in a sticking point on the chart with a horizontal red line. This marks a resistance area, as price initially reacted to this zone and bounced off it. However, price then broke through this area and reacted to it in the opposite way, forming a bearish pin bar. This is what we call a ‘change of polarity’, as old resistance has become new support.

 

After the completion of this bearish pin bar, I put an order in to go short at a 50% retracement of the pin bar, with a stop loss placed just a few pips above the high of the pin bar, and no initial target set at all, intending to manage the trade. I managed the trade by using the three-bar rule, whereby the stop loss is moved to just above the high of the high of the last three candles. This kept me in the trade for some time, before the stop loss was finally hit for a profit of around 4.5 times the risk. This is a good return for any trade, and it just goes to show the benefit of using the 50% retracement entry.

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