After taking profits on our USD/JPY short, the pair immediately corrected and ripped higher through daily resistance.
The price action we've seen since I wrote that last USD/JPY blog on LeoFinance is a prime example of why my entire trading strategy is designed around the 1:3 risk:reward ratio for risk management.
Tight stops with attainable profit targets to take advantage of that initial bounce that we almost always see around higher time frame support/resistance zones.
Back to the present and to get a sense of where we are now, let's dive straight back into the price action on the USD/JPY daily chart.
As I mentioned at the top, price has since ripped through previous daily resistance and is now retesting the zone this time as support.
What this does is shift my bias to only look at playing USD/JPY from the long side.
With that bias in mind, the next step becomes zooming into an intraday chart to look for an entry.
Take a look at my thinking on the USD/JPY hourly chart below.
You can see that I've drawn a short term zone in blue.
This is simply drawn from the last area of obvious short term resistance before price broke through the higher time frame zone, that when retested as support, can be used as an entry.
You can also see that price has retested this zone once before and if you had have traded the zone back then, would have got 1:3 out of it quite easily.
One of the cool things about forex trading and my strategy in particular, is that you don't have to be first in order to make money.
The market will almost always give you a second chance to get long if you've missed the boat and this could be a prime example of that.
It's a good thing too, because as retail forex traders, we're never going to be faster than the algos so there's no point in even trying to be.
Using support/resistance zones in this manner and managing our risk to take advantage of 1:3 risk:reward ratios gives us a tradable edge that we can exploit.
So let's now wait and see how price reacts to the short term zone if we push a little lower from here.
Our scenarios would be...
If it holds, we're getting long straight away.
If price goes through the short term zone but still holds the higher time frame zone, we'll re-asses our entry point.
If price dips all the way through the higher time frame zone, then the trade signal is invalidated and we instead flip our bias to the short side.
Best of probabilities to you.
Data to Watch:
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