Forex Entry Rule (aka how to screw up a trade really fast)

Timing is everything, especially in forex. I’m showing you how to screw up trades by not having a proper forex entry rule in your trading strategy.  This is from a live trade I did this week:

NZDJPY Daily Chart
NZDJPY Daily Chart

This is the NZDJPY chart on the Daily timeframe for the past week.  On November 21 I placed a sell order which almost immediately moved in the wrong direction.  I lost 85 pips before the trade triggered its stoploss.

Here’s what happened and how to prevent it from happening to you.

A few things to note about this chart:

  • The red horizontal lines are support/resistance lines from the weekly timeframe
  • The yellow horizontal lines indicate where I entered and where I expected (as do the green/red arrows but they are hard to see)

If you are purely a technical trader, then this was a perfect entry point – the Stochastic is crossing the 80 line from above which is a strong downward momentum indicator.   This is where relying on purely a single technical indicator can lead to a failed trade.

4H Timeframe

What happened was my forex entry rule was wrong (or at least, I interpreted it wrong).   Let’s look at this on a different angle:


Again – yellow lines are when I entered/exited.  The red arrow is showing where I entered, the blue arrow is showing when I exited.

So what happened exactly?

It’s really quite simple – until now my forex entry rule has been partially based around the Stochastic indicator on the Daily timeframe.  But on the lower timeframe at the time I entered, the Stochastic was showing a strong upward momentum which continued for 3 candlesticks.   My trade was destined to fail the moment I entered it.

What I should have done (and will be doing this moving forward), is waited for the Stochastic on the 4H to indicated downward momentum.

If I had simply waited about 12 hours to enter this trade, I would have ridden the short term momentum down which follows the daily momentum.  In short, if I entered later I would have made 85 pips profit instead of losing them.

Weekly Timeframe

To add insult to injury, let’s look at the weekly timeframe:

NZDJPY Weekly Chart
NZDJPY Weekly Chart

Not only did I entered at the wrong time, I entered as what was likely the worst possible time of the entire week!  See the lower yellow line, I entered essentially at the lowest point in the week and was forced out of the trade near the highest point in the week!

Revising My Forex Entry Rule from Lessons Learned

What this trade taught me to start looking at the lower and upper timeframes when considering a swing trade.  You want to catch the trend at the proper timing and to do that you need a forex entry rule which checks for it on multiple timeframes.

Looking back over my my failed trades for the past few weeks, I see this happened several more times.  And some of my winning trades I could have hit my profit target sooner if I followed this rule!

Moving forward – I will now be looking at the upper and lower timeframes for the pair before entering the trade.