New Trading Technique
In this trade, I introduced a new trading technique called “ratcheting.” This technique can be used for Forex Sailing, Forex Surfing, or Forex Swimming. In fact, it’s particularly useful for scalping the forex market. I’ll be sharing videos with more about scalping soon, but you can learn about it below…After to days off from forex market observation, it felt good to have a rest & be ready for another week! There aren’t any major fundamental announcements for the next 2 days, so it’s smooth sailing & surfing! In addition to waiting for the AUD/USD to breakout of the consolidation formed on Friday, the USD/JPY looks ready for a move on the 4hr charts. This is a little different, because we’re not at the III point, but rather have reached II after retracing to III. We can possible enter at II and ride it to IV with our stop at III. Look at the picture below:
As you can see in the picture above, the 4hr downtrend was broken with an almost perfect retrace to the 61.8% level (a 38.2% retracement). Now that we’ve just broken the high of II (see below), we can expect to hit a IV based on fibonacci projections… I’ve pointed out the key points here: 
Since the market isn’t open yet (it will be in minutes), I’m going to wait to set my order to make sure there aren’t any serious gaps, which may cause me to rethink this trade…Entry Order Set
My entry order is set for 88.61, which is the price that I need to hit to have a fibonacci reward/risk ratio from the fibonacci spreadsheet calculated targets of a stop at 87.63 & limit at 89.63. Keep in mind that we’re not riding the 4hr wave from III to V, but from II to V (on the way up from III), which is another way to trade a fibonacci wave… Here’s a screenshot of the fibonacci spreadsheet filled out:
The price of 88.61 may not be hit, if the trade takes off upward the trade simply “almost happened.” Even if our limit is hit before the stop price, we need to get an entry price that gives us the right reward/risk profile (~161.8% +- 5%). We’ll see what happens!Trade Entered
My limit order was filled, so I entered the trade. I’ve already given most information about this trade above, so I’ll quickly summarize again. currency pair: USD/JPY Timeframe: 4-hr charts I: 87.00 II: 88.63 III: 87.98 IV: 89.63 *This trade is an alternate trading method where we don’t ride the full wave from III to IV, but rather ride it on the part of that wave that moves once we break the high of III and ride it to IV. This shrinks the trade into placing our stop at III, instead of I – but our limit is still at IV. This is also what we would do if we got in at III, we’d adjust our stop at this point. Here are the entry snapshots:
Once this limit order was reached, I adjusted my stop/limit prices: 
And now have the following open position: 
Now the only thing to do is wait…A Close Call
I woke up this morning and noticed that I came within 3 pips of getting stopped out on this trade, which was a very close call! Here’s a chartshot:
That was a strong bounce off a fibonacci level & the previous low from a few days ago. We’ll just have to wait to see what happens next!Profit Taken – But Still In Trade
At o5:13 am GMT on 07/11/2010, I exited the trade at 89.01 for a profit of 40 pips. This was a $4.72 net gain for my $200 trading account (2.5% of the account in one trade)! But I’m still considering myself in this trade (I’ll explain in a minute). If I have set this trade & went on vacation, it would be a legitmate plan to wait until the stop or limit was hit. But since I’m paying attention it made sense to exit at this point.Potential Head & Shoulders
There are two red dots on the chart below, indicating the high that was hit, and the next attempt at breaking that high being 5 pips lower. This is a potential reversal signal, so it was a good time to exit the trade.
Also notice the channel that’s now formed in the image above between 89.10 & 88.00 (lines are drawn on the charts). Basically the 2nd wave from our original trade didn’t go the full 100 pips, it only went about 50. This was a good opportunity to get out near the top with 40 pips.Re-entry Possiblity???
The chart still looks very strongly inclined to move further up. By zooming into the 5-min charts, there are two possible re-entry scenarios. A: the price moves up, then retraces back down on the 5-min charts. B: the prices form a 5-min downtrend and at some point that downtrend will break into an uptrend. I’ve illustrated these two scenarios on the 5-min chart below (notice how prices are in the channel):
Continuation Trade
If I re-enter this trade, it’ll be for a better price than the one I exited at 89.01. For illustration purposes, let’s say scenario B happens and I re-enter the trade at 89.80. When the price gets back to 89.01, I would have made an additional 20 pips plus the 40 I made by exiting at 89.01. If the price goes down, then at least I didn’t lose the pips from 89.01 to 89.80. This is an advanced technique that I’ll be creating videos to explain really soon. It’s basically shifting your mind from a sailing to a surfing mentality during the trade for bigger potential gains.Possible Re-entry
Now we’ve come to the bottom of the channel formed between 88.0 & 89.10. After testing the bottom of the channel with a low of 88.06 & rising back up to 88.35 currently – I have an entry order for 88.20. It may not get hit as prices could rise back up into the channel, but it’s ok because I can’t lose money on a trade that I don’t enter. If I get in at 88.20, I’ll have a stop at 87.98 and a limit and will only risk 22 pips for a potential profit of 90 pips (89.10 – 88.20 = 90 pips), which is a 410% reward/risk ratio! And since I already made 40 pips on this trade, I still can’t lose overall. Here’s a current screenshot of the trade:
Trade Re-Entry
After trending up into the middle of the channel for a few hours, the price came back down and hit 88.20. I’ve now got a stop at 87.98 will ratchet up my profits. Ratcheting is something that I haven’t taught yet, so this will be the first time I explain it. I entered at 88.20, I’d like to have a limit at 88.30 to grab 10 pips, but I have it at 88.33 because eToro will only allow a limit to be set currently 10 pips away. If the channel holds for another day like it’s been for the past 2 days, I should be able to grab a bunch of pips. Ratcheting will allow me to grab even more…Ratcheting Explained Briefly
Ratcheting is where you enter a trade and enter/exit repeatedly to capture more pips. If you’re going long, as soon as you enter a trade, you place a limit order 10-20 pips higher. As soon as the limit order his hit, you bank the pips. Then you set an order to buy back at a price 5-10 pips lower. For an 80 pip move, you can pick up 120 pips! Every time you ratchet successfully, you diminish overall risk and increase potential profit!Rathchet Summary:
1. Buy @88.20 at 1:21 am GMT (stop is at 87.98 from previous trade analysis) – immediately set limit to sell @88.31 2. Sold @ 88.31 at 2:02 am GMT (now I’m at +50 pips on this trade
– immediately set buy order @ 88.26 3. Bought @88.26 at 3:15 am GMT – immediately set limit to sell @88.37 (wouldn’t allow 88.36) Not part of the ratchet, but bought at 88.08. Stop is still 87.98. For an extra 10 pips I can double the potential profit if the prices stay in the channel. this is always a risk because prices could breakout of a the channel when we’re on the extreme downside. Now I’ll ratchet up with the 1,000 units @ 88.08. 4. Placed limit order to sell @88.13 (just the units I opened in last part of trade, not the units I bought at 88.26). 5. Sold 1,000 units @88.13 at 5:31 am GMT, immediately placed an order to buy back @88.10 6. Bought 1,000 units @88.10, looking to sell @88.13 7. Sold 1,000 units @88.13 at 7 am GMT , immediately placed order to buy back @88.12 8. Bought 1,000 units @88.12, looking to sell @88.15 9. Sold 1,000 units @88.15 at 7:21 am GMT, immediately placed order to buy @88.14 10. Bought 1,000 units @88.14, looking to sell at 88.21 *Don’t follow this unless you understand it. I’ll be creating videos later to explain this…Got Stopped Out!
At 7:30 am GMT on 7/15/2010, I got stopped out of this trade. The trade resulted in an 18 pip net gain.
rapidforex.com (Brian Campbell)
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