The First Touch Trade

The First Touch Trade

The first touch trade is a trade I use after a very strong move. The First Touch has five important components, each of these components should be in place for a valid First Touch Trade. 1. A Very Clear Zone is Present 2. The Market Trades Far Beyond this Zone 3. The Market Comes Back to Touch this Zone 4. The Market Prints a Trigger Candlestick on the First Re-touch 5. The Market Trades Beyond this Trigger Candlestick I will look at each of these components of the Fist Touch trade, with chart examples. A Very Clear Zone is Present Here the NZD/JPY is showing a clear support/resistance zone at 64.70 - there have been several touches on this zone from below (resistance, indicated by red arrows) and several touches from above (support, indicated by blue arrows). Thus, we have the first component - a very clear zone is defined on the chart. The zone is the first critical piece for the First Touch trade. The zone must be a well-defined zone. This zone should jump out - like a gymnast on one too many Red Bulls. It should be an

obvious zone. If there are any questions about the clarity of the zone or the clean touches on the zone, the zone is not good enough for the First Touch trade. Clarity of the Zone A clean zone will have several touches that make identifying the zone easy. The line chart should confirm these zones. The touches on the 64.70 zone are exceptionally clear on the NZD/JPY daily chart. This would certainly qualify as a zone with clarity.

Clean Touches There are several very nice, clean touches on the zone. Note that the market never closes on the other side of the zone during the touches in the chart below.

The Market Trades Far Beyond the Zone The defining feature of the First Touch trade is that the market blasts through the zone. The move is often violent and punctuated by large candlesticks. The market completely falls through the 64.70 zone on the daily NZD/JPY chart. Notice the candlesticks below the zone are very large, suggesting considerable momentum is behind this move. Some traders may feel as though the market has already made the strong move, and the trade opportunity has passed. This is not the case. The first touch is a great opportunity to trade the markets after such a move has occurred.

The Market Comes Back to Touch the Zone The defining feature of the first touch trade is the re-touch. The re-touch occurs when the market comes back to the zone. In the chart below, the CHF/JPY daily chart, after spending more than 20 days below the 64.70 zone, the market returns to the 64.70 zone.

A Trigger Candlestick on the First Re-touch Once the market returns to the zone, a trigger candle is needed to initiate the trade. The daily NZD/JPY prints a very nice long-tailed candlestick on the zone, the first time the market has reached this price level since falling through the zone. The important thing about the trigger candle is that it is a bearish candle (for sell trades, for those buy setups the candle should obviously be a bullish candle). This candle is clearly a bearish candle. Note that while many traders may consider the long-tailed candle on the zone a trigger candle, some traders may decide to wait until the next candle prints - as this candle is more clearly a bearish candle, with a close near the low of the candle.

The Market Trades Beyond the Trigger Candlestick The entry for the trade is 5 pips lower than the low of the trigger candlestick. Using a sell stop below the low of the trigger candle ensures that the market must trade in the expected direction before the trade is initiated. In this case, the candle after the trigger candle pushes through the sell price and the trade is triggered. Here the market trades lower than the trigger candle, triggering the trade.

The stop loss is placed above the trigger candle.

Exiting the First Touch Trade Many different exits may be applied to the First Touch trade, but one simple exit is to target the nearest clump of candlestick lows for a sell trade (obviously, for buy trades a group of candlestick highs will work as a target). In this example the market reaches the target in 8 candles, for an overall profit of 382 pips. The risk on this trade was 106 pips, making the reward to risk ratio is more than 3:1 for this trade.

Another Example A new market example may best illustrate the other type of First Touch trade (a buy trade). For this trade we will take a look at the EUR/USD 4-hour chart. A Very Clear Zone is Present The zone at 1.4023 on the 4-hour EUR/USD chart is clear. There have been three recent touches as resistance on this zone. The red arrows mark these touches. This is a very clear zone is on this chart.

Clarity of the Zone The line chart shows the clarity of this zone at 1.4023 - the market never closed above this zone, but instead has come very close to the zone three times. The line chart should confirm the clarity of the zone.

Clean Touches The touches on the 1.4023 zone are very clean. Clean touches are those that respect the zone. The market never trades higher than the zone during these three touches. The first touch (red arrow) is on the zone. The second touch (blue arrow) is slightly below the zone, but this is still a brush with the zone. The third touch (green arrow) is another near miss, a higher touch than the second touch, so it still counts as a touch. Note how each of these touches respect the zone and never trade higher than the zone.

The Market Trades Far Beyond the Zone The defining feature of the First Touch trade is that the market blasts through the zone. The move is often violent and punctuated by large candlesticks. The market completely jumps beyond the 1.4023 zone on the 4-hour EUR/USD chart. Notice how the market does not retrace, all candlesticks are bullish candlesticks after the breakout. This suggests a strong breakout, and an ideal candidate for the First Touch trade.

The Market Comes Back to Touch the Zone After the market traded over 200 pips above the zone at 1.4023, the market starts to get weak. A few close misses suggests that the market is ready to touch the 1.4023 zone. The market has not touched the zone yet, so we do not see a trigger candlestick.

A Trigger Candlestick on the First Re-touch The First Touch trade is triggered once a trigger candlestick prints on the chart. For this bullish First Touch trade the obvious trigger candlestick is the long-tailed candlestick on the zone, the first candlestick to touch the zone again.

Note that while many traders may consider the long-tailed candle on the zone a trigger candle, other traders may not have confidence in this candlestick, and may wait for a stronger bullish candle such as the candle some traders may decide to wait until the next candle prints - as this candle is more clearly a bearish candle, with a close near the low of the candle.

The Market Trades Beyond the Trigger Candlestick The entry for the trade is 5 pips higher than the high of the trigger candlestick. Using a buy stop for this trade entry means the market has to first trade in the expected direction before the trade is triggered. Here on the EUR/USD 4-hour chart, the candle after the trigger candle trades higher than the buy price and the trade is triggered. The market trades higher than the trigger candle, so the trade is initiated.

The stop loss is placed below the low of the trigger candle.

Exiting the First Touch Trade A simple way to exit this trade is to target the recent candlestick highs. This trade bags 137 pips by exiting at the recent highs. The stoploss is below the trigger candlestick, 42 pips away, so the reward to risk ratio is better than 3:1 for this trade.

Summary of the First Touch Trade The First Touch Trade is a great trade for capturing profits after a strong breakout in the markets. The following characteristics summarize this trading strategy: 1. A Very Clear Zone is Required 2. The Market Must Breakout Beyond this Zone 3. The Market Touches this Zone Briefly 4. The Market Prints a Trigger Candlestick on the Re-touch 5. The Market Trades Beyond the Trigger Candlestick 6. The Trade is Exited at Recent Candlestick Highs (Buy Trades) or Lows (Sell Trades) www.fxjake.com/dailytrader If you like Naked Trading, you will love the Daily Trader program. For more information on how you can get trading systems, money management tools and trading psychology techniques sent to you daily, visit the Daily Trader at FXjake