When the market sets up just right, with the right context and good signal we must take the trade. In this article I talk you through a pullback reversal trade that I took this morning on the EUR/USD forex pair.
I normally take my first peak of the day at the markets about 7am UK time. This is the time that the forex markets normally get going again after a quiet period at the end of the Asian trading session.
We can see from the chart that the bears had control during the Asian session and the market was in a downtrend approaching the Euro open at 7am.
Bar 1 on the chart appeared in the middle of the night and was a good signal for those awake at that time to go short for a pattern break pullback trade as the market confirmed its move out of the trading range (blue box) from yesterday.
Around 7am I was able to draw a pattern line just below the lows of the pullback from the overnight downtrend. I was looking for signs that the downtrend would continue.
Bar 2 was an inside bar at the 20 EMA and when the following bar took out its low the market was surely heading south. I didn’t take this signal to trade as it didn’t set up perfectly for me.
The signal bar 2 was just above the EMA (I like the signal bar to be below) and the bar before bar 2 was a bull bar. I would have preferred a bear bar here.
The market did indeed fall for ten pips or so and then started making its way back to the 20 EMA.
At 8am I was poised to take my trade. The pullback had almost reached the 20 EMA and the 7.55 bar (bar 4), was a small doji with a bearish body. It was nearly an inside bar (with bar 3) and it was settled just under the 20 EMA. It looked like a good signal bar to me for a trend continuation trade.
I needed the 8am bar to take out the low of bar 4 and cross the pullback pattern line for my short trade to trigger. It did this within a few seconds of opening.
8am is the London open and the market can be quite volatile at this time so I allowed a ten pip stop for my trade. However on this occasion the 8am bar was a long bear trend bar and so it was perfect for me.
My target on these forex breakout trades is 20 pips. So I had a 2:1 reward to risk on the trade. We had made a good start with the entry bar and I could only see one possible hurdle for the trade to overcome, which was a horizontal support line at 10563. This was a few points before my target.