With FX volatility picking up and trends turning parabolic, it’s easy to miss out on strong trends. One good example is the current 830 pips rally in dollar-yen. Traders that are not long now probably feel that they have missed too much already, and so hesitate to trade. Risk-reward ratios with longer time frames will also not be favourable in a strong trend.
Traders using the daily time frame for dollar-yen would probably identify ¥105 as the nearest major low. And with price trading near ¥109, a long position at current levels would require a 400 pips stop loss. To trade with a good risk-reward ratio, dollar-yen needs to rally by an additional 400 pips to cover the initial risk, which does not happen too often, hence a high risk trade.
How can we then justify going long at elevated levels?
To make this happen, we can use a shorter time frame like the 30 minute time frame. With this, we can see that ¥108.50 has acted as a buy zone since Friday last week. If we are bullish and enter the market now, we would risk 50 pips. Yet if markets rally to ¥110, we will make 100 pips, which is a respectable amount if only risking 50 pips.
So when markets are trading strongly, and the risk-reward ratios are not good in your given time frame, you can switch to a shorter time frame, which will show you the relevant support and resistance to use. When markets turn sluggish and stop respecting our short-term levels, it’s time to return to a longer time frame.
If you want to see how I use this live, then feel free to join me tomorrow at 9:30am for our daily webinars. www.dailyfx.com/bulls
City A.M.'s opinion pages are a place for thought-provoking views and debate. These views are not necessarily shared by City A.M.