The “Slam Dunk” Trade for a 1000 Pip Move [Revealed]
Before I get into the analysis of individual price charts this week, let me remind you that I have an inherent bias against trading the markets from May through September, especially the FX markets.
That’s because there’s often a seasonality where we typically get very range-bound, choppy market behavior from May through September, especially when you look at November through to April in comparison. Those latter six months are almost always the most fertile time for trading.
For example, I've taken thousands of pips out of short USDJPY trades recently and thousands of pips out of long GBPNZD trades too. Big trades are what I look for, but unfortunately now is not the time for them. It may surprise you to know that I make most of my money on less than half a dozen trades per year.
This also emphasizes why it’s so important to take a patient and disciplined approach to trading, especially in environments like this which are likely to persist for the next several months.
Now I’m not saying I won’t be trading at all for the next several months. I’m pointing out that you need to understand the trading environment is as important as your trading setup. In the wrong environment, even the best setups often fail to deliver. Chart patterns that normally herald a major change in direction instead just fizzle out with a little real opportunity to profit.
EURUSD (the Euro versus the US dollar) is a good example. As you can see, EURUSD is getting into some very range-bound, choppy price behavior. This isn’t what I want when trading.
As regular readers know, I won't put on a trade unless I can see at least a 150 pip outcome and typically I'm looking for 300, 500, even 1,000 pips of potential profit.
That’s because I'm seeking significant directional bias in my trades. I certainly don't want to get into a boxing match where the market just goes sideways and movement becomes both arbitrary and random. In that kind of environment, you're duking it out with your broker to scrape out 20-40 pips here and there … if you’re lucky.
That’s not the objective of my trading and so there are various strategies I use to handle this environment which I’ll cover in a moment.
The first thing you should observe is what’s happening overall, which is that after a tremendous period of volatility in multiple assets due to the global health crisis, this volatility cannot be sustained and appears to be ebbing away.
This is consistent with what I typically see during the summer period.
The last six weeks of trading in GBPUSD (the British pound versus the US dollar) offers another example of this narrow, sideways market environment.
This represents a market where you can get chopped up financially and emotionally because you literally don't know where the market’s going to go. Not only are you losing money, but you’re also losing confidence and this can lead you to abandon an otherwise sound trading system.
My highly successful trading method involves looking at defined patterns and typically I won’t put on a trade unless I can see a 150 pip win. For that size profit, I'm normally looking to risk about 50 pips on the trade, meaning that I seek a 3:1 risk/reward ratio under normal circumstances.
But in environments like this, that’s just not practical due to all the choppiness and random noise. During summer months I reduce my risk/reward objective to 1.5:1 or 2:1.
I also lower my position size and trade with much wider stop losses. This reduces my risk significantly.
I also accept a much longer holding period before a trade pays off (or not).
And all that comes into play after I see a pathway for a given trade to work in my favor, of course.
Yet right now GBPUSD isn’t looking any more promising than EURUSD. It’s bouncing in a narrow range and it's inherently unpredictable. For the record, there’s a long-term downtrend in GBPUSD (bearish) and the pair has, in fact, caught some support (bullish), but the market needs to confirm either view with some appropriate price action.
Remember that after putting structures over the price action, you have to sit back and observe the market’s subsequent price action. Does it confirm the structures or not? Right now I could make the case for GBPUSD either way: either the downtrend is dominant or the possible double bottom is dominant. It’s just too ambiguous to make a decision yet.
So that’s why capital preservation is the best trade in situations like this. Sometimes sitting on your hands is the best choice. Now I realize this isn't the sexiest discussion because we all want to trade. We all want opportunities, but frankly, recognizing the environment and recognizing where the opportunities exist and where the traps exist is probably the most central thing to your trading over the long term.
So are there any opportunities at all right now?
Probably the best example I could give is this long-term view of the major trend in the USDJPY (the US dollar versus the Japanese yen).
On this chart, I'm looking at the 45-year history of USDJPY. It starts in the mid-1970’s where the yen was 350 to the dollar and runs through to today, where it’s 107 to the dollar.
USDJPY has been in a long-term downtrend and while it looks like it's been sliding sideways for the last couple of decades, it’s still been making a series of lower highs to form a descending triangle.
There’s nothing on this chart that suggests that USDJPY is going to reverse its long-term trend, so it doesn't matter to me what it does for the next one month, two months or three months.
That’s because the long-term move is obvious. In fact, I’m looking to add to my short position on any bounce because I believe that eventually, USDJPY’s going to break in the direction of the trend.
Now, of course, patience is required. I’m already short USDJPY from the 107 area and I'm looking to hold this trade for 3-6 months if necessary. I don't care if it just bounces around or if it goes back to 108 or 109 as I’ll just short more.
I believe that when USDJPY finally breaks down, building this short position will really pay off. At this point, I don't know when that will occur, but to my mind, it's not “if” USDJPY goes lower, it's “when”.
If you’re trading on 15-minute charts or the like, you’re probably going to just get cut up by this range-bound choppy environment. Instead, I suggest standing back and looking at the global long term view as I’m doing with USDJPY.
Once you understand what’s going on, then you can set your big trades accordingly.
So how about some non-USD pairs?
GBPAUD (the British pound versus the Australian dollar) is one I’m paying very close attention to because its patterns and price action suggest that the next move is going to be lower.
There are 15 years of price action on this monthly chart and we can see there’s been a downtrend marked by lower highs. The recent bull run appears to be over.
GBPAUD is currently tracing out an ascending broadening formation and at a minimum, I would expect this pair to approach the lower end of the pattern. That means we’re likely to see a 1,000 pip drop.
To get a better idea of how and when it will get there, here’s the weekly chart:
The ascending broadening formation is very evident here, plus the fact that the price broke down from the formation and then re-tested the edge of it before dropping once again.
So to my mind, the downward trajectory of GBPAUD has been more than confirmed. My target for this trade is the base of the ascending broadening price formation. That means there are at least 1,000 pips on the table here.
The daily chart offers even more evidence to back up my conviction:
Here we get a clearer picture of how GBPAUD broke out from the ascending broadening formation and retraced before falling once again.
I'm not ruling out the possibility that GBPAUD could get into choppy sideways action before the descent resumes.
So the best way to set up your trades is to pick a smaller lot size and use a much wider stop loss. How wide is “much wider”? Well, I’m setting my stops to 300-500 pip ranges while I wait. I realize that sounds extraordinary. However, I think these measures are worth it because GBPAUD could drop at any time and I don’t want to miss this one.
Let me show you a position size calculator to help you manage your own trading risks:
This calculator at MyFXBook will tell you how big a position size to set for a given risk, account size and base currency.
For example, if you have a USD$2,500 account and you want 0.5% risk with a 300 pip stop loss, this calculator will tell you how large a position you can take while staying within those risk parameters. In this case, you’d be risking $12.50 (0.5%) and you’ll live to fight again another day even if things go wrong. At the same time, you’re giving yourself the chance for a big winning trade along the way.
Remember that over the summer you should assign a lower risk to your account and a wider stop loss. Managing your risk is really the key to long term success, especially in range-bound environments.
I don't mind holding short trades for days, weeks, and months because I understand what the charts are telling me and where I believe the trajectory is going.
In the meantime, what’s in store for gold and the stock market? They’re the glamorous, sexy markets where everyone wants to know what’s happening next.
Let’s take a look at XAUUSD (spot gold):
Four weeks ago, gold made a multi-year high at around the $1,750 level and since that time, it hasn’t
been able to break through to make new highs.
We could be looking at a healthy consolidation before gold goes higher. Alternatively, this could be the basis of a major reversal.
Either way, the series of inside bars since that new high suggests there’s a lot of compressed energy in gold right now. It’s just waiting to be released.
Be on the lookout for an opportunity either way, as I suspect we’ll see a breakout from the current logjam relatively soon. That should give us a clue as to the next major direction for gold.
The NASDAQ stock index is similarly ambiguous:
The NASDAQ is now more than 70% off its lows from February and March.
What’s more, this is probably the best example I can think of as to why “price is the news” and price is the only thing that you should be paying attention to when trading. That’s because, despite a backdrop of record Depression-era unemployment numbers of 14.7%, this index is actually up for the year.
(By comparison, the unemployment rate in the 2008 crash was only 10%.)
We’re looking at record metrics for GDP contraction too since it's estimated that US GDP could contract up to 30% next quarter. So why have the NASDAQ and the other US stock indexes been rising so strongly?
Perhaps the Fed unprecedented liquidity really will make a difference. Maybe we’ll come out of the recession much more quickly than expected.
Your guess is as good as mine because I can’t pretend to know the reasons. All I can say with certainty is that ultimately, the price is all that matters. I trade based on the price, not the news. And right now the NASDAQ is trading within the boundaries of the same price formation I just pointed out in GBPAUD: an ascending broadening price formation.
These patterns can either be continuation patterns or reversal patterns, but usually, they’re reversals. In the meantime, the index is trading at the upper levels of the ascending broadening formation and the path of least resistance is higher.
While I think this market is ultimately short, I have to see the pathway there yet. There's no reason to get ahead of the market.
And that’s why I’ll wait for the market to tell me what it wants to do. This might take some time yet, as I don’t see this market collapsing overnight as it did earlier this year. I think we need to build out some space before a serious decline can begin.
The volatility will likely be high in the current area as the bulls and bears fight it out. So I’m staying out until I see a clearer signal.
And that’s it for the week!
I favor short positions in USDJPY and GBPAUD for long-term traders who understand the need for wider stop losses, smaller position sizes, and longer time horizons.
Understanding the current market environment is the best suggestion I can give to help you avoid getting the worst of what could be a choppy, range-bound market in the near future.
I wish you a very healthy and prosperous trading week.
Mark "PriceIsTheNews" Shawzin