The USD/JPY pair broke above the 99.50 resistance level a few days ago, and has since retreated. The retreat took the pair back to a low 99.30 – right near the top of the old resistance area. The fact the market held this level, combined with a strong day today which is pushing the price back above 100.00, provides a potential swing trade to the upside.

If the old resistance level continues to hold we have a potential trade.  Currently the pair is trading at 100.47.

We have two potential entries. The first entry is a daily close above 100.42. This is a more aggressive entry in that the market will have not yet proven it is going to resume the uptrend, but has simply given us strong indications that it will. That said, the risk in pips for this trade will be lower.

The other possible entry is a daily close above the recent swing high at 101.42. The higher entry price shows the market is continuing the uptrend (higher highs, higher lows), yet, our stop in pips will be increased due to the higher price paid.

Here are the setups for both trades:

1.     BUY on a close above 100.42 (this could be soon)

Stop at 99.25.  This is a risk of 117 pips (assuming an entry around 100.42).

Profit Targets at 104.80 and 109.00.  This is a reward of 438 pips and 858 pips approximately.  It is approximate because we do not yet know our exact entry price which will be based on an upcoming daily closing price.

OR

2.     BUY on a close above 101.42

Stop at 99.25.  This is a risk of 217 pips.

Profit Targets at 104.80 and 109.00.  This is a reward of 338 pips and 758 pips approximately.  It is approximate because we do not yet know our exact entry price which will be based on an upcoming daily closing price.

Downsides of the trade:  The upside of the trade is that we have seen a pull back and thus far a successful hold above the old resistance level (now a support level).  The downside is that that this pullback was relatively small compared to other pullbacks we have seen in this pair.  With the pair still showing some signs of being overbought (this is not a bad thing in and of itself, it is actually a sign of recent/current strength) the danger is that we could still see a pullback possibly back into the 98 area.

-On the flip side, strong trends generally always show oscillator type indicators nearer to overbought levels.  Also a small pull back can be a sign of strength as the market was not able to push prices much lower before moving back higher.

These comments are made not to confuse, but rather to help you gain an understanding of the thought process you should go through before you a choose to incorporate a certain strategy into your trading plan.  For information on building a trading plan please see my article in the March issue of Technical Analysis of Stock and Commodities magazine, or you can find an abbreviated version here on the site: http://vantagepointtrading.com/tips-and-tricks/trading-plans

The amount of pips multiplied by the number of lots should not exceed 3% of your total account balance (less is even better).   For example if you have a mini account, each pip movement is approximately $1 US.   If you have $10,000 in your account you can risk 3% of $10,000 which is $300.  That means you can take 2 mini lots for the first trade and risk $234 (derived from 2 X 117).  If you take 3 lots your risk would be $351 which is more than 3% of your account balance.  If you take the second entry you can only take 1 lot.  Bottom line control risk on every trade if you want to stay in this game for the long term.

~Cory Mitchell
Market Strategist

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One Response to “USD/JPY Forex Swing Trade Signal and Set-UP”

1. admin says:

   April 10, 2009 at 11:59 pm

   My daily close for this pair was 100.23, below the trigger price. Therefore the trade has not been entered yet…we shall see if we are triggered in early in the week.

   Have a great weekend!