Theta Trend

Background on the trade:

This trade is part of the Donchian Channel breakout system I trade.  From late last year and into this year the Yen was extremely weak and my Donchian system captured a huge part of that move.  After that trade ended, the Yen has been trading in an ever tightening range.  I feel like the Yen is starting to look like a coiled spring and this morning USD/JPY looks like it might be getting ready to break out to the upside.

Quick note about Forex and the USD/JPY pair:

All Forex pairs are presented as “XXX currency/YYY currency.”  Any time you trade Forex, one currency is sold and the other is purchased.  In the case of USD/JPY, we’re selling Yen and using that money to buy USD (US Dollars).  As a result, when the price of USD/JPY goes up, the dollar is getting stronger relative to the Yen.

An easy way to think about Forex pairs is that the pair on top of the ticker code, in this case USD, also gets stronger when it goes up on a chart.  Does that make sense?  If not, feel free to send me an email on the About page and I’ll do my best to clear it up.

Trade entry discussion:

As you can see in the USD/JPY chart above, the 50 day Donchian channel has been slowly contracting and getting closer to the market.  At the same time that the Donchian channel has been contracting, the average true range of the Yen has been decreasing.  However, this morning, it looks like the pair might be getting ready to head higher.

Trade specifics:

Take a volatility sized position in the USD/JPY so that 3 times the average true range is equal to 1% of account equity.  100.60 is my current entry point on the upside.  The initial stop will be equal to the greater of 3x the average true range or the 25 day low.  Disclaimer:  this is being presenting for educational purposes only and is not a recommendation to enter a trade.