What is a Last Kiss

The last kiss is a catalyst specifically designed to avoid the fake-out. If you have traded breakout systems in the past, you know how often these fake-outs will occur. Although the last kiss is not guaranteed to avoid all fake-outs, it will provide you with a valuable method of filtering out many of the very worst fake-outs that fizzle quickly. The last-kiss trade is a simple method that confirms the validity of the breakout signal, and it is based on a sound naked-trading principle. This is known as the retouch principle.

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A close examination of the last-kiss trade will illustrate how this trade incorporates the retouch principle. Take a look at the chart in Figure 5.9 where a breakout candlestick prints after the market trades between two zones for some time.

FIGURE 5.9 The consolidation box forms on the EUR/GBP daily chart, followed by a breakout candlestick.
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The last-kiss trade is not triggered on this initial breakout candlestick but is, instead, triggered much later. The standard breakout trade is initiated when the market moves beyond one of the support and resistance zones. The last-kiss trade is not triggered until later. Why is it important to wait?

Take a look at the losing trades . Do you notice a common theme?


Figure 5.7
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Figure 5.8
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The previous charts, the USD/CHF four-hour chart in Figure 5.7 and the AUD/USD daily chart in Figure 5.8 illustrate the problem with many breakout trades. These trades often quickly fizzle as the market moves back inside of the consolidation box. Not only that, but the market often moves back inside the consolidation box quickly. This tendency, the tendency for failed breakouts to quickly jump back inside the consolidation box, is the peculiar behavior that is important to the last-kiss trade.

Most of the failed breakouts will quickly jump back inside the consolidation box. However, a true breakou —those trades that extend beyond the consolidation box and then keep travelling—will often move back to the support and resistance zones for a retouch. The last-kiss trade is a specific subset of the breakout trade. Not every breakout trade is a last-kiss trade, but every last-kiss trade is a breakout trade.

In other words, the last-kiss trade is based on the retouch principle.The market will often come back to a significant zone once the market has expanded beyond the zone, and the last-kiss trade is designed to take advantage of this typical market behavior (once the market retreats and moves back toward the consolidation box). The reason for waiting for the market to come back to the consolidation box is to confirm that the market will, indeed, respect the boundaries that were formed by the consolidation box. In this way, the trader will jump on the trade only when the market comes back to kiss a consolidation box (see Figure 5.10).

FIGURE 5.10 The last-kiss trade is signaled on the EUR/GBP daily chart once the market returns to the edge of the box for a retouch.
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This is why the trade is known as the last kiss. The trade is initiated only when the market returns to the consolidation box to kiss one of the support and resistance zones that formed during the consolidation.
This is obviously a very different entry to the standard breakout trading strategy. The best way to get a sense for the last-kiss trade is to examine a couple of examples. Take a look at the EUR/USD daily chart in Figure 5.11.

FIGURE 5.11 The EUR/USD daily chart shows two fake-outs preceding the last kiss. The last kiss is triggered once the market breaks out above the consolidation box, and then returns to the edge of the box for a retouch.
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Here we see the EUR/USD has had two failed breakouts prior to the last kiss in Figure 5.11. The first fake-out is a false breakout to the upside, but the market quickly falls back inside of the box. There is also a brief fake-out to the downside, but the market drifts back inside of the box soon after that fake-out. The last break out is a true breakout, and it is also a last-kiss set-up. The market trades outside the box to the upside, and then returns to the edge of the box to find support before continuing onward in the direction of the breakout (see Figure 5.12).

FIGURE 5.12 The market continues trending higher after last kiss on the EUR/USD daily chart, notice how the retouch is a nice bullish candlestick.
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Notice how the market prints a very nice bullish candlestick at the edge of the consolidation box in Figure 5.12. It is not enough for the market to simply re-touch the zone and then pause; the market must print a strong candlestick in the direction of the breakout to trigger the last kiss.
by Alex Nekritin and Walter Peters

Once the market returns to the edge of the consolidation box, it must print a strong candle in the direction of the breakout. Therefore, if the breakout is a bullish breakout (up), then the retouch candlestick must be a strong bullish candlestick. A buy stop is placed above (see arrow) the high of this bullish candlestick (see Figure 5.13).

FIGURE 5.13 For bullish last-kiss trades, a buy stop is placed above the high of the bullish retouch candlestick.
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Likewise, for the bearish breakouts, when the market comes back to retouch the edge of the consolidation box, the market must print a bearish candlestick. The entry for the last kiss is a sell stop placed below the low (see arrow) of the bearish candlestick, just as you see in Figure 5.14.

FIGURE 5.14 For the bearish last-kiss trades, such as this one on the daily CAD/JPY, a sell stop is placed below the low of the bearish retouch candlestick.
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Once the market trades through the entry price, the last-kiss trade is on. There are two stop loss signals for the last-kiss trade. The first stop loss is the emergency stop loss, and this is placed at the midpoint of the consolidation box. Under most circumstances this stop loss will not be hit.

The calculation of this emergency stop loss is simple.
1. Subtract the resistance-level zone from the support-level zone.
2. Record the number of pips; this is the width of the consolidation box.
3. Divide the width of the consolidation box by 2.
4. Add this amount to the support-level zone.

This price level is your emergency stop (as shown in Figure 5.15).

FIGURE 5.15 The emergency stop loss for the last-kiss trade is placed at the midpoint of the consolidation box. For this CAD/JPY four-hour last-kiss trade, the stop loss would be at 87.09.
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The CAD/JPY four-hour last-kiss trade makes for a great example (see Figure 5.16).

FIGURE 5.16 Calculating the emergency stop loss for a last-kiss trade on the CAD/JPY four-hour chart.
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First, subtract support zone, 85.95, from the resistance zone,88.23 (85.95-88.23 = 228 pips). Divide this amount by 2 (228 pips ÷ 2 =114 pips).

Next, add 114 pips to the support zone, 85.95 to find the value for the emergency stop loss.
85.95 + 114 = 87.09, so the emergency stop is placed at 87.09 for the CAD/JPY four-hour last-kiss trade (see Figure 5.17).

FIGURE 5.17 The emergency stop loss for the four-hour CAD/JPY last-kiss trade is 87.09.
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There is another exit signal for the last-kiss trade that is more likely to be triggered than the emergency stop loss. If the market closes back inside the box after the last-kiss trade is triggered, the trade is exited.

This will usually mean taking a much smaller loss than the emergency stop loss (see Figure 5.18).

FIGURE 5.18 This is a last-kiss trade on the GBP/USD weekly chart. The first arrow marks the last-kiss candlestick, where the sell trade is entered. The second arrow marks the candlestick that closed inside the box, triggering the end of the trade.
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This exit signal is usually triggered for a much smaller loss than the emergency stop loss. The GBP/USD weekly chart in Figure 5.18 shows a last-kiss trade that prints this exit signal. The trade is over once a candlestick closes back inside the box. Most of the failed last-kiss trades will be exited with this rule. Under most circumstances, it is unlikely that the emergency stop loss at the midpoint of the consolidation box will be hit.

The second stop loss is much more likely to be hit, which means that the average losing trade for the last-kiss trade is quite small. This is an attractive feature of the last-kiss trade. Many naked traders enjoy trading the last-kiss trade because this second stop loss significantly reduces the size of the losing trades.

The last-kiss trade is a nice way to trade high-probability breakout trades.Here are the steps for the last-kiss trade:

• Wait for price to consolidate in a box between two zones.
  
• The box should have at least two touches on both zones.
  
• Wait for price to break beyond one of the zones.
  
• Once price returns back to the consolidation box, wait for the market to print a last-kiss candlestick on the edge of the box.
  

For sell trades, a sell stop is placed below the low of the last-kiss candlestick,and for buy trades, a buy stop is placed above the high of the last-kiss candlestick.

• Emergency stop loss is placed in the midpoint of the consolidation box.
  
• The profit target is the nearest zone.
  

Test the last-kiss trade; you may be surprised at how well this trading system filters out fake-outs.
by Alex Nekritin and Walter Peters