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A Close Up of USD/JPY Forex

A Close Up of USD/JPY Forex
March 12
20:49 2012

In day trading and investing the key to success is to learn how to cut the losing trades and hang on to the winning trades. Although a simple concept it is not easy to implement. It is also common knowledge that in trading you have to give in order to receive, which means that some trades may go negative at first before they start to move in your favor. How much a trader allows a trade to go negative depends on their risk tolerance or at times the size of their entire account. On the flipside however, the market can pay an almost infinite amount of money if it does go in the trader’s favor. How much a trader can make depends on how long they can hold on.

The Chart



Here is a 4 hour chart snapshot of the USD/JPY forex pair ranging from February 1, 2012 to March 9, 2012. This chart includes several technical indicators:
• 8 period simple moving average (blue line)
• 20 period simple moving average (red line)
• 200 period simple moving average (yellow line)
• Bollinger Bands (purple lines)
• Relative Strength Index (RSI) (dotted line)
• Volume (dark blue bars)

The Walkthrough

In the chart of USD/JPY there is a classic bullish signal on the 4 hour chart when the price breaks above the 200 period simple moving average. The price continues upward and the 8 period and 20 period simple moving averages begin to climb upward as well, eventually crossing the 200 period simple moving average. If a trader decided to take a long position in this forex pair, waiting until the break and hold of the 200 period simple moving average offers the lowest risk entry. The USD/JPY has maintained its upward momentum over this time period. However the question now becomes, how long should a trader hold on to this trade?

There are several methods traders can use as an exit strategy. The common one is to wait until the instrument produces a bearish candlestick pattern that may signal a reversal of the trend. These are marked on the chart with red arrows. The first one appears on as a bearish engulfing pattern. At this point the trader would have only gotten about 20% of this move up. The trader may have also chosen to get back in the trade at which point they would stay in until the next bearish pattern occurs. This method allows the trader to minimize risk and avoid having to sustain pullbacks in the price.

Another strategy is to wait for the price of the instrument to break the 8 period simple moving average. These exit points are marked by the blue arrows. This method would allow the trader to stay in the trades longer than if they were exiting on bearish signals, however the trader would have to have the discipline to hold on during pullbacks of the price. The third strategy is to wait for the price to break the 20 period simple moving average. These exit points are marked by the red arrow. This method allows the trader to stay in the trade for a majority of the move upward without having to enter and exit several times, which minimizes the fees. However this method requires the highest amount of discipline as a trader must wait for the price to actually close below the moving average which means they will have to watch as their profits shrink a little.

The Lesson

Whichever method a trader uses to exit trades depends really depends on their ability to apply discipline in sticking to that method. It will also be determined by how well a trader can manage their emotions, fear and greed, so that the fluctuations in their PnL do not force them to exit the trade too soon.

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