Paper trade: Short AUD/JPY @ 84.53, Stop 85.00

I haven’t done one of these trade analysis post for weeks. So I thought I’ll start the year on this promising long term (more than a week) trade on one of my favourite currency pairs, AUD/JPY. This entry on shorting AUD/JPY is executed according to my Forex Trend Reversal (FTR) setup. Figure 1 shows the weekly chart. Please excuse the mess. There are only 3 relevant lines in addition to the price.

Referring to Figure 1, first line of note is the top of that 4-line descending channel. Notice that 84.50 correspond with the resistance this week. Secondly, there are 3 ascending trendlines drawn. We have a triple X-cross on the 2 ascending and 1 descending lines at around 85.00 last week. AUD/JPY failed to touch it. If this trade goes well, AUD/JPY shouldn’t test 85.00 again because it has missed its chance. That’s where I placed my stop. Anyway, these are just doodles on a chart, we need confirmations. For that, let’s take a look at the major Aussie crosses and gold prices in Figure 2.

AUD/JPY, weekly

Aussie crosses and gold, 4-hour

The recent strength in Aussie is clear in the 4-hour charts of Figure 2. From top to bottom, Figure 2 shows AUD/USD, EUR/AUD, AUD/JPY, and GC (gold futures). We also see that gold prices is staying at a depressed level below 1120. This rising Aussie but toppy gold price is a sign of divergence.

Furthermore, we have a shooting star candlestick pattern in the previous gold price bar. Gold spiked above 1130 briefly but couldn’t hold above 1120 so far. Another plus for the short.

Now that the entry signals have been met. I needed to time my entry. This the the part that I should have done better. I basically just shorted it at the ’50 resistance without giving it much thought. The short-term bullishness is still strong and I really should have waited for a lower high on the 3-hour chart. Figures 3 and 4 are the daily and 3-hour charts, respectively.

AUD/JPY, daily

AUD/JPY, 3-hour

I took a smallish position in this trade at an obvious resistance level. My intention is to add to it as long as AUD/JPY stay below 85. Also, a safer stop should be 85.50 as seen from Figure 3 (daily). 84.40 was a recent top in October.

Lastly, I chose to short AUD/JPY instead of AUD/USD because I have some other U.S. dollar longs already.

AUDJPY Short 81.37/77.17: Anatomy of my first 400+ pips trade

420 pips in my demo account to be exact. Still, I feel very lucky.

In this post, I will review why I entered this position, why I added to it, and why I exited. The goal is for myself to learn from what works and what can I do to improve on this trade given some hindsight advantage.

The Signal

See Figure 1 on the daily chart of AUDJPY (first entry price pointed with blue arrow). Notice the lower highs, with the 2nd high inside my fChannel and the 3rd (last, just before entry) high below a yet longer term fChannel. Plus 1 point for the lower highs and another 1 point for the highs moving into the channels. Two points here.

AUDJPY

The Choice

While both AUDJPY and AUDUSD seemed promising. I focused on AUDJPY because the Yen seemed better poised for strength. I discussed my method of choosing a better counter currency for trading in another post, so I won’t discuss it here. However, as this trade became more and more obvious and into the green, I diversified my short by adding shorts in NZDJPY and NZDUSD. Those two netted around +100 and +250 pips also.

Another plus 1 point for picking and choosing.

The Confirmation

What really gave me confidence in this trade is the price action in gold in comparison to the Aussie. Figure 2 shows the Gold Futures price (/GC, lower left) and Australian dollar futures (/6A, middle left). Notice that gold has been trending up steadily for days but the Aussie made a lower low. That’s a negative divergence. Plus 1 point.

4-hour charts of forex markets, gold, and crude oil

The Timing

For timing this trade, I observed the intraday movement of AUDJPY, EURUSD, and other related pairs. The most obvious sign of Aussie weakness was from comparing the price action of EURUSD and AUDJPY. The 3-hour charts of EURUSD and AUDJPY are shown in Figures 3 and 4, respectively. Notice on Nov 24 and 25, EURUSD trended higher and made a new high. At the same time, AUDJPY barely moved on the 24th and squeezed even more on 25th. The difference was even more noticeable when I was watching the 30-min at the time. I had thought that my datafeed was lagging when AUDJPY barely moved yet EURUSD was rocketing up.

Plus 1 point for the 3-hour price action and then another 1 point for the 30-minute price action (not shown).

EURUSD, 3-hour

AUDJPY, 3-hour

The Entries and Exits

Six points total for the trade, time to establish a position. You can see my orders in Figure 4 above. My first entry was Nov 25 15:12 at 81.37 with a half position. It is marked by a yellow triangle at the cliff beforethe dive (how lucky). I added another half that evening 23:06 at 79.94. I was waiting for a 50% retracement to 80.50 to add but that didn’t seem to be happening. So I added 1/2 when AUDJPY failed to break 80.0 with a strategy to add another at 80.50. But 80.50 never happened and it took another dive.

My exits are determined at the time as usual by using stops. I simply keep moving the stop along and narrowing them once we break support level. After the move became vertical, I zoomed out to the daily chart to view potential targets. The 77.0 and 76.00 levels (as shown in Figure 1) became my not-be-greedy targets. I had my stops really tight at those point and even had a take profit set for half the position at 76.0, but that level wasn’t tested before I got stopped out.

The two red dots at 77.17 and 77.08 are my stopped exits as shown in Figure 4′s last bar.

The Conclusion

What made this lucky trade happen is that I had spent a lot of time analyzing it from different perspectives and watching the intraday price actions for days. I also took my time to scale in and out to minimize my risk. To make this a habit, I will use this point counting system from now on to help me analyze more and trade less.

One thing that I’d like to improve upon is to be more aggressive on a winning position. How? That will be saved for another post when I figured it out.

How to use FX futures to narrow down which forex pair to trade

A problem I have is that once a currency pair shows a viable trading setup, other related pairs often show the same setup too. A reason for this phenomenon is that markets don’t operate in a vacuum. When markets really move, everything move together. So the highly correlated markets can scream for entry at the same time. The real question though, is which one should I put my chips in?

There are limitless methods on how you can approach this. The one I’ll talk about in this post is a simple method of comparing your candidates using the currency futures. Why use the futures? Because they provide a standardized platform, which is essential when comparing things. As a bonus, there is a US dollar index futures to help with analysis of the dollar. Not a trivial process on its own.

I will explain my method by way of an example. This morning, I was considering to go long in AUD/JPY, CAD/JPY, AUD/USD, or short USD/CAD according to signals from my FTC setup.

Sure, I could have just choose which one to trade based on the RSI rating or some other indicator. But I don’t put much faith in indicators for various reasons. So a method I typical use is to just go through the charts to manulally identify which has better reward/risk or better support/resistance. As you can imagine, this is very time consuming.

In practice, I only compare AUD/JPY vs. CAD/JPY and AUD/USD vs. USD/CAD, and then compare the winners of those two matches. Like in a tournament. Not that much of a hassle but the issue with this approach is that I’m adding another layer of uncertainty with all these unscientific comparisons. That could have a significant negative impact on my trading.

In a good trading strategy, every step taken should be to improve your probability of success or the reward/risk ratio. As such, it’s better to keep my process simple.

This is where the currency futures indices is of value. They provide a big picture perspective and serve as a standardized data for comparison. Using my example, I needed to choose between shorting US dollar or Japanese yen (I repeated the process for choosing AUD or CAD). Figure 1 below shows the 4-hour chart of both currencies for the past 10 days. It’s evident from the chart that the US dollar is in a range and the Japanese yen (actually it’s JPY/USD) is moving up. 1 point goes to US dollar trade.

Next, I identify the strength of the support/resistance to estimate in the case that the trade goes against me, which would have better cushioning. It’s a crude form of risk estimation.

From the figure below, see that the dollar has a clear resistance just below 76 and it is currently stretched away from the cyan-coloured moving average. Whereas the yen is near a recent top with no prior occurence and it has been sitting above the moving average for a while. Another point for dollar short.

USD 2 : JPY 0. Consequently, I went long AUD/USD this morning instead of AUD/JPY.

This is by no means a vigorous methodology. I’m not saying that shorting US dollar is a good idea from this simplistic comparative process. It’s just that my setup tells me to go long AUD/USD or AUD/JPY, this is just a quick and easy way to help me decide which trade to take. Nothing more.

As an aside, some people may prefer to use currency ETF, UUP and FXY, instead. But I don’t like to use ETF as a data source as the price is noisier because they are affected by other factors.

US dollar and Japanese yen futures indices

Paper trade: Stopped out AUD/JPY longs @ 81.3 (+7 pips) and 81.29 (-28 pips)

My AUD/JPY long from yesterday got stopped out after I moved the exit stop to a breakeven price. Then I gave it another try once AUD/JPY had a quick dip and recovered to 81.30 level around Tokyo noon. That has been a time of large moves recently. My entries and exits are shown on the 3-hour chart of AUD/JPY in Figure 1.

The problem with this entry is that the downside momentum is stronger than I thought. While being wrong is perfectly fine in trading, I need to put more thoughts in short-term analysis to improve my probability.

In addition to the analysis which I’ve done as previously discussed for my entry, I am going to take into account yet another shorter timeframe for my trade timing. Figure 2 shows a 30-minute chart of AUD/JPY.

Referring to Figure 2, the two blue triangles are my entries. The two red dots are my exits from stops. In hindsight, my first entry was about an hour early. Short-term resistance was obvious at 81.60 but there is no short-term support shown. I should have entered either above the resistance or when we failed to break 81.10 support the second time.

For the next few hours from 12:00 to midnight, AUD/JPY is testing that long term resistance fChannel as shown in Figure 2. We can see that the trendline is imposing a strong resistance on the pair as it hasn’t been able to hold more than a few bars above it.

The second entry at 81.60 is acceptable. AUD/JPY tested 81.30 again but managed to jump right back up. Particularly if we look at the 3-hour chart of Figure 1, it would seem that this is merely a short-term retracement from the 82.00 resistance. A stop at 81.30 as I have done has limited risk and it would mark the line in the sand.

If I’m to try going long this pair again with this setup, I would use a half sized position only as the setup has failed me twice already. But as can be seen in Figure 2, AUD/JPY is failing 81.30 this morning again. This is an obvious sign of weakness in the pair. So that’s it for me for now to go long in this pair.

A more detailed log of my trades can be found on my trade log page.

AUD/JPY, 3-hour

AUD/JPY, 30-minute

Paper trade: Long AUD/JPY @ 81.22, SL 80.99, TP 82.50

Several major pairs are testing their support on this market correction with a 20 points drop in the S&P500 before 10 am. This is a short term capitulation scenario.

From looking at the major pairs, the long term trend still seem to be intact. In particular, I am interested in shorting Yen because I’m seeing FTC setups across the board in JPY crosses.

I compared AUD/JPY, CAD/JPY, EUR/JPY, GBP/JPY, and USD/JPY pairs to decide which one to go long with. Seeing that I already have a USD/CHF long position, USD/JPY is out. Then EUR/JPY is out too because of recent Euro weakness from my observations of intraday price actions. I haven’t had much luck with British Pounds, so GBP/JPY is out too.

That leaves me with my two favourites, CAD/JPY and AUD/JPY. So I checked with USD/CAD and AUD/USD charts to see which has better support/resistance. USD/CAD has a lot of resistance above 1.06, so going with CAD/JPY long seem like to be less risky. However, from looking at the 3-hour chart, I changed my mind to go with AUD/JPY long because it is showing a positive divergence there.

From the daily chart of AUD/JPY shown in Figure 1, we can see that the up-trend is losing steam. The price action is expected to be choppy. Long term condition, up and choppy.

AUD/JPY

Figure 2 shows the 3-hour chart of AUD/JPY, this is where things get more clear. Notice that AUD/JPY is testing the lower fChannel the third time in a month with the lowest RSI. This is a clear positive divergence.

AUD/JPY, 3-hour

However, the strong short-term down move is making this long entry very dangerous. Thus, I am using the NYSE intraday sentiment (Fig. 3) to pin point my entry. Notice the extreme negative open and then the intraday positive divergence as shown by the S&P500 and TICK.

NYSE intraday sentiment

As part of my analysis for this trade, I compared the current scenario with earlier this month. Figure 4 is the hourly chart of AUD/JPY when I entered this trade. Figure 5 is the hourly chart of AUD/JPY from Nov 1st – 4th, when AUD/JPY last tested the lower fChannel. I noticed that AUD/JPY had a tendency to break below my fChannel by about 50 pips before reversing. With the fChannel at 81.80 today, AUD/JPY should fall to 81.30. I watched that level closely this morning and timed my entry with the intraday sentiment as described above.

AUD/JPY, 1-hour

AUD/JPY November 1st-4th, 1-hour

Position size: 100%

Entry: 81.22, entered based on intraday sentiment.

Stop: 80.99, below round number support.

Target: 82.50, previous congestion and near top of channel.

Reward / Risk = 128 / 23 = 5.57 > 3. A risky trade with great potential.

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