OKE FOREX

Monday, 15 April 2013

Calm trend trading strategy

Last week I introduced you to 4 types of market conditions that prevail in any financial market. They are: calm trend, volatile trend, calm range and volatile range. I took time to explain to you the concept of calm range and how you could trade that type of environment. Today I want to continue talking about market conditions and discuss how you can define a calm trend and the way you can trade it. I like this trading system as it keeps you least nervous while trading due to the nature and size of market moves under these specific market conditions.

Defining calm trend

In a calm trend you would see: a clear breakout from its� previous range (that�s how it starts) and then orderly movement of price forming higher highs and higher lows continuing from a week to multiple months. You would seldom see very strong counter trend rallies and if you do these would be short lived and market would again form some reversal pattern that would be a unique opportunity for you to jump into a trade and go with the flow. When I started trading Forex in 2004 I saw a lot of these kind of trends in the market. At the time US dollar and Japanese Yen would be in these calm down trends most of the time.

Ranges before trends

Securities would spend from a few months to half a year in a range and then break it and develop a trend for a month or three. Then another range would form. It was (and is) quite easy to trade these kind of market states. You just enter a buy stop above the highest point of the range and a sell stop below the lowest point of the range and when one of these are broken you go with the market. It is quite difficult to predict market bottoms and tops as well as exact timing when a break or a bottom (top) will occur and therefore you enter a trade when market has already gained some momentum and is going forward with force. So, you might miss the beginning (bottom) and the end of the move (top), but you get the middle and do not forget that the middle is where the market move at its� peak strength.

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Mechanics of bottoming or topping or how market prepares for big moves

When market bottoms (in a range) are formed you have a lot of choppy price action as those who are driven by inertia of a previous swing (down) are selling the rallies (at least they think these are rallies). However, smart money start going in the market in bottoms accumulating amateurs� money (those that do not see that the trend is changing).

I noticed that a calm trend will often develops when market stays for a long time in a range. Five months is often the case. You would also see the narrowing of a range before the thrust up (or down if downtrend starts). This narrowing range is a clear indication of accumulation (or distribution if they are getting ready to push a security down) of positions by smart money and can be an early signal for you to enter a small position in the anticipated direction. So, when the move does occur you already have some profits that would be a good cover for you to open new and bigger positions (or a line of positions) when the strong move finally starts.

usd/jpy example

We also saw this kind of calm trend in Yen pairs at the end of 2012. There was bearish momentum in Yen since the end of summer, but real acceleration started in the middle of November after Bank of Japan as well as government officials started expressing their policy regarding current state of economy and their wish of weaker Yen as well as stimulation of the market. That�s when calm trend really started and continued till February of 2013 (and looks like it still may continue for some time). The best study case for the move is usd/jpy pair. Open a daily chart of the pair and you can see that from June the first (2012) till November the 16^th (2012) the pair was in a big range after a �volatile trend� down (from the middle of March to June of the same year). If you know anything about chart patterns you will also see that during five and a half time period Dollar/Yen pair an inverted head and shoulders pattern. The left shoulder (the lowest low of it) was made on the 1^st of June (2012), the head on the 13^th of August (2013) and the right shoulder (the lowest low of it) on the 9^th of November (2012). You can also see that two very important resistance points were formed during that period. The first one on the 24^th of June when price hit 80.61 level and on the 2^nd of November when price hit 80.67 level.

Now, looking at the left side of the pattern (left side of the head) we still see quite strong power of bears. usd/jpy rallies were met by severe selling that could be seen on daily bearish candles (25^thof June, 22^nd of August, 7^th of September and 19^thof September (last important bears fight). So, any time price rose to resistance US dollar bears did come in and started selling. The last attempt on the 19^th of September was short lived and bears failed to form lower low. From that time on we saw an increasing bull power and weakening power of bears. The right side of the inverted head and shoulders pattern (starting from the head) is dominated by the bulls. Any attempt of bears to push the price lower was met by much stronger bulls power that can be seen on daily bullish candles (28^th of September, 11^th of October, 30th of October and 14^th of November).

Entries

Seeing this happening the only logical conclusion was to plan your long entries above the two resistance points (mentioned earlier). You can clearly see that it was really an excellent entry point and after it was breached a calm trend developed. Higher highs and higher lows with short consolidation patterns along the way show the strength on the tendency.

Now, when these nice moves happen most traders make most of their money. You must be ready to squeeze out of the market as much as you can and you do it by opening additional positions. One of the ways is to enter extra buy stop orders above these short consolidation patterns (�peaks� in the chart). You can also wait for a reversal pattern on hourly charts and get better prices, but the way to add to a position in this way is a little more complicated (hope to explain it in my future posts).

Stops

A classical method of placing stops in this kind of trend is to place a stop below the low of the day (if market breaks upwards) when a break occurs. You place the stop above the high of the day when the break downwards occurs. In our situation, the resistance that we anticipated to be was at 80.70 level. It was broken on the 15^th of November. It means we have to place our stop below the low of the day, which is 80.12. We can slightly modify the level by placing it 5-10 pips lower, just if the market comes back to �kiss� the break point.

What about line of position or other positions that you open as the market continues moving upward? Firstly, you wait for retracements (counter trend rallies) and then reversal patterns to enter the trend with extra positions. You then place stops below the valleys (in an uptrend) and above the peaks in the downtrend.

Exits

One classical way of calculating where you should exit your position is to calculate the high and low of the previous range. That would be the minimum distance that the trend will cover. The previous range was rather small, only 350 pips. So, you could have exited part of your position at around 84.20 level and let the other positions ride.

Price action determines exit levels best

The best way to exit the market is to watch price action. As the calm trend progresses you will see more and more counter trend moves. In this case, it means that more and more bears are stepping in. At some point you will see a major correction rally (read about it in my post: Fortunes are made when trends change), then an attempt to go beyond previous high. If there is a failure you can assume that the trend really changed and you should exit your position and wait for a real reversal as well as the best points to enter a new developing trend or trade a developing range (calm or volatile). Looking at the current price action we see that the pair was able to make higher highs and this tells us that the trend isn�t over yet. So, if you are very patient and determined to trade long term trends this calm trend would have been an excellent opportunity to make nice cash.

Fundamentals still matter

We know that this long and strong move was inspired by fundamentals, basically verbal financial policy of BOJ and the government of Japan position regarding stimulation of Japan�s economy. On the 4^thof April they confirmed their financial policy during interest rate decision meeting and took aggressive action to stimulate the economy. You can clearly see how the market reacted. usd/jpy pair moved more than six hundred pips in six days. Pretty big rally, huh? So, it is good to know when and what fundamentals come out and then watch how market reacts to the data.

Conclusion

In order to be able to trade any financial markets one must be able to identify specific market conditions that the market is in at a given period of time. Four basic market states and knowledge how the mechanics of each one of them works enables you to trade any financial market efficiently. Today you read how to identify, prepare and trade a calm trend market and make profits as a result.

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Read my other posts:

Best Forex trading system
Calm range trading strategy

Short lived momentum reversal trading system

How to make money in trading breakouts

Nicolas Darvas trading system

Spotting how market trends change

Disclaimer

Trading financial markets carries a high level of risk, and may not be suitable for all investors. All information on the blog http://trend0.blogspot.com/ is of educational nature and cannot be considered as advice, recommendation or signals to trade in any financial markets.

Wednesday, 10 April 2013

Calm range trading strategy

I want to start the article by referring back to my last post where I said that I expected Japanese Yen to strengthen against all other pairs. As you may see the trend shift (from bearish to bullish) did not materialize and my stop losses were hit. However, it was a �pre-planned� loss and I am not stressed about it at all. I often start building a line of my positions in the direction of an �expected� trend and if it does not happen I can suffer a loss of about 10 to 15 percent. However, if it does happen I easily double my account. That happened a lot of times. The most important thing is to limit your losses and multiply your profits when they come. Ok, now let�s move to today�s topic � calm range trading strategy.

If you want to consistently make money trading you must take only those trades that offer you better odds of winning and ignoring those that are average or poor ones. This might be said easier than done, but as practice makes everything perfect you can learn to find these high profitability odds trades quite easily. The hardest thing, actually is not to find them, but to patiently skip all those daily �half-good and half bad� trades.

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In order to be able to find these high profitability trades you need to define what state a market you want to trade is in and how this �state� is traded best. Markets can be in four kinds of states:

Volatile trend
Calm trend
Volatile range
Calm range

Each one of these has its� own specifics of trading. Each one of them can be very difficult to trade if you just come at any place a market is in and expect to make a trade. No, you need to define areas where the market will reverse or break out and trade the areas accordingly. I want to write a series of articles describing each specific market condition and how you can trade that. Today will be the first article on calm range. I prefer this type of market to volatile range as entry and exit points are much clearer and you can place smaller stops than you have to do in a volatile range markets.

Defining calm range

So, what is calm range? It is a market that is consolidating after some swing or trend move. It is a market that has quite clear points of bottom and top. The market moves within these limits in a very orderly fashion. When a bottom is hit the price forms a reversal pattern and starts orderly moving upwards by forming higher highs and higher lows. The same happens when the top of the range is hit. The price forms a reversal pattern and then in a very orderly fashion starts moving down by forming lower highs and lower lows.

Finding high and low of the range

The first step to trade that you need to define the highest point of the range and the lowest point of it. Now, the range can be narrowing so you need to see how these support and resistance areas change! If we talk about Forex we know that by nature some currency pairs are more volatile and some are very orderly. The most orderly pairs are eur/chf and eur/gbp. If you are a conservative trader and want to trade less volatile pairs the above mentioned ones could be a good option for you.

Let us skip eur/gbp and look at eur/chf as it is in pretty calm range at the moment. After a sharp move down the pair formed the low of the current range (it is consolidating) at 1.2118 (on the 26^thof February) and the high of the range at 1.2390 (on the 8^th of March). It then started making lower highs and lower lows (clear sign of a swing low). The further it went the more the move down slowed. It is a clear indication that more buyers (of Euro) started coming in. Then at the end you can see a cluster of daily candles with very small lows. A break above the highs of those could have been a good long entry point if you trade these calm ranges. You can see that it came very very close to the above mentioned lowest point of the range.

Signs of an impending reversal

When you see the pair coming to this support point you would naturally expect a reversal. How to judge whether it will happen or not? I want to see those clusters of candles when the price finally fails to hit new lows and runs to some daily resistance point. At this point you can see a lot of volatility and very narrow daily range. The pair goes to the low of the day and then back to its� previous day�s high. It can continue for three or four days. This is a clear indication that a breakout is coming and the odds are that it will be upwards. That is exactly what happened with eur/chf. Market moved through the resistance of three days� high when the news from Switzerland failed to meet market�s expectations. A buy stop above 1.2171 could have been an excellent level to enter the market. (Other signs I look for: Alternatively 123 reversal pattern may also be formed, which would indicate of upcoming reversal. Bullish candles also tell me about a swing change).

Exit points

Now, where could we exit our trade? Following classical technical analysis definition we know that previous support becomes resistance and previous resistance becomes support. So, we need to check to see where the market reversed near resistance to find our exit point. We clearly see that 1.2300 level served as support for some time till fundamentals came and the market crashed. This is our exit level. I tend to exit the market ten pips earlier, so possible exit level is 1.2290 now.

Catalysts of a reversal

One more important thing to remember is that market often needs a catalyst to break through some resistance or support point and that catalyst is often fundamental news. So, when you market your technical points and expect a reversal be sure to look at your Economic calendar to see what fundamental news events are coming to be aware of possible fundamental catalysts.

Ok. I hope you benefited from the post. I would continue the topic of different market states in my next post. Hope to do it very soon! If you liked the post I would also be happy if you gave a plus on Google+, tweeted, liked it on Facebook and other social platforms. Have a nice day.

Vytas.

If you want to start investing in financial markets such as Forex, stocks and commodities I recommend trying innovative social investment platform of Etoro.

http://www.etoro.com/A41516_TClick.aspx

See my other posts:

Best Forex trading system

Forex news trading

Short lived momentum reversal trading strategy

How to make money in trading breakouts

Spotting how market trends change

Nicolas Darvas trading system

Trading supply and demand

Fortunes are made when market trends change

Disclaimer

Wednesday, 3 April 2013

Fortunes are made when trends change

Markets present a lot of opportunities for short term, intermediate term and long term traders when specific market conditions appear for those who use appropriate trading system for specific market conditions. It is of uttermost importance for those who monitor market swings and trends to capture a change in the trend at the very inception of it, enter position or line of positions and then take a good bite off the move which follows (if it does). Every year these kind of moves do develop in currency markets as well as in other financial markets. Being a daily follower of various currency pairs I take daily advantages of day trades, short term swings and likewise eagerly wait for those big moves. As Jesse Livermore once said:� Big money is in big moves�. Big market sharks wait for these as they can easily double their capital when trends change. Whatever trader you are be aware that big opportunities lie for you if a trend comes and you better set aside other type of strategies and do some trend trading.

Looking at the current picture in Forex I predict that a shift in Yen trend is about to happen. You probably know that various fundamental factors (mostly verbal threats about stimulation from Japanese government and Central bank officials) cause Yen to collapse tremendously since the middle of November 2012. However, the price action over the last few months in most of Yen pairs show that the downtrend of Yen has probably exhausted itself and an uptrend (in Yen) may start any time now. What are my arguments for this statement? I have a number of factors how I identify when a trend changes and I want to present them in the article. Let us look at them.

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An uptrend line has been broken in most of Yen currency pairs

If you look at gbp/jpy (Pound Yen) and eur/jpy (Euro Yen) pairs you will clearly see that the trendline in the pairs has been broken. I drew the trendline from the point where the ascent of the currencies started. That is not the lowest point. A trendline (in my definition) has to connect two points (without piercing the price) (it may connect more) from the lowest possible point (in uptrend) to a major correction point (look at the chart to see what I mean). So, if the 13^th of November is the lowest possible point for (gbp/jpy) drawing a trendline and the major correction point is the 26^th of February we can clearly state that the trendline was broken yesterday (the second of April). For eur/jpy pair the starting point is the same as that of gpb/jpy (13^th of November) and the major lowest correction point is the 25^th of February (day earlier than for the British pound). Now, for eur/jpy the trendline was broken even earlier than for the pound (17^th of March) and the price went under the trendline (on the 21^st of March). Remember, if price goes through (does not matter whether price closes or not) the trendline (it is broken).

After major correction prices failed to reach higher highs

That is another rule that I look for while trying to identify whether a previous trend is really over and we are going to see a major reversal. Both pairs (gbp/jpy and eur/jpy) meet the criteria. Pound Yen pair made a lower high (highest point after correction) on the 14^thof March and failed to go beyond that. Euro Yen pair reached the lower high (the second peak) on the 11^th of March and now is playing around with the lowest point that was reached during major correction (26^thof February). A failure to reach higher highs shows that the uptrend clearly lost its� steam and a possibility of a downtrend increases sharply. Trendline break and lower high rules can be seen not only in gbp/jpy and eur/jpy, but also in cad/jpy and partly in nzd/jpy (it modestly went above the peak of 14^thof February and then went down).

Bank of Japan has so far done only verbal promises about stimulus (no real actions yet)

Real Yen downtrend started when Bank of Japan and government officials started talking about necessity of stimulus, weaker Yen, end of deflation and other bla-bla-bla type of stuff. However, nothing has really been done in practice yet. These were just talks. Today we gonna see how much of what they were planning to implement will be done in reality (interest rate decision release should be accompanied by some kind of statement about stimulus). The market has already priced in huge stimulus on the part of the Bank of Japan. If it does just that or less, Yen will definitely strengthen and the downtrend will shift to uptrend. I do expect 1000 pips + collapse in most of Yen pairs from current levels.

Of course, you never know what the Central Bank of Japan officials have prepared. They may introduce much stronger stimulus than they had initially planned. If, however, they just do what they promised Yen will definitely rise as most of the future events are already priced in by the market. So, let us wait and see what happens today and for the remaining of the week.

I do not expect the downtrend to be very fast (1000 pips a day), but downtrends are usually faster than uptrends, so I am getting ready for a nice ride down. I am risking around 10 percent of my deposit on the trade at the moment. Even if I expect to increase my capital substantially I always place stops and on these longer term trades I would not risk more than 15 percent. I risk 2-3 percent per trade on my day trades. When you prepare for a trade you have to think in terms how much you can afford to lose, not how much you are going to make. This is how you control risk. You do not want to risk all of your capital on some probable windfall. No, my plan firstly is to stay in the market long term and secondly� to make money. Opportunities always arise, so I do not need to worry about squeezing every possible dollar from the market or trying to do a �home run� every week. This is not healthy psychologically. Think about risks first and profits will take care after themselves.

Entry levels

A classical way to jump into a starting trend is on the break of the major correction low. That is the place where the second point of the trendline is drawn. For eur/jpy it would be a break of 118.70 level (February 25^th low). For gbp/jpy it would be a break of 137.81 (February 26^th low). I would follow the rule for eur/jpy pair as I do not see other better way to enter a possible downtrend in the pair. However, this rule might be somewhat modified looking at the current technical structure of some Yen pairs. I basically mean gbp/jpy. There is still quite a substantial distance to the major correction low. Around 300 pips at the time of writing. If you look at the daily chart of the pair you will see that while trying to reach a previous peak the pair failed and formed a nice reversal pattern (8^thof March through the 1^st of April) with support at 142.00 level. That level was another choice for entry having in mind that trendline was broken and the pair failed to reach previous high. I did enter short below 142.00 and placed a stop loss at 143.45. If I am wrong and the downtrend will not start any time soon I will not lose much. If, however, the pair collapses and reach major correction low I will already have a substantial profit and be able to consider extra positions on the way down and increase my profits as a result. So, I have taken care of my risk (losses) and if my predictions are right profits will take care after themselves. If the break really occurs I will open extra positions in other positions and try to do some pyramiding too.

Possible exits

Exits are a little more complicated and far more important than your entries. You never know how far the markets will go. My targets maybe too optimistic and price may never go to the place I assumed it will go to. Therefore it is essential to trail my stops. In case of a downtrend, weekly highs could be a possibility. This is for intermediate and long term trends. That is what I am expecting for Yen pairs.

One way that I will use this time is placing some of my exits near previous resistance, which is now support. Looking at weekly chart I see that 134.00 (for gbp/jpy pair) is a logical place to close at least some of my positions.

Another is to exit at a place where the move really started accelerating. The philosophy behind this kind of closing a trade is the idea that price always comes back to the place it came from. Applying the rule for closing a trade above the support it would be 130.00 level for gbp/jpy.

The third possible scenario is to calculate the difference between the top of the move with the major correction low and subtract the difference from the major correction low. The difference between the top and the major correction low (in this case is about 1000 pips). So, the last closing target would be 127.00 level (almost exactly the place where the price started accelerating upwards).

You can do your own calculations for eur/jpy or any other Yen pair. If the opposite trend does develop all of the pairs will fall (Yen will rise). If you decide to take these short trades be sure to calculate your risks. And be even more careful if you decide to pyramid your trades (open a number of positions).

As you can see the rewards for these kind of long term trades are much bigger than possible losses. This is the reason I am willing to risk more than I do on my swing or day trades.

Do not forget that big money is in big moves and fortunes are made when one identifies a change in trade and executes his trades in the direction of the move with proper entries and exit levels.

Let us see what happens with Yen!

Ok. I hope you benefited from the post. If you liked the post I would also be happy if you gave a plus on Google+, tweeted, liked it on Facebook and other social platforms. Have a nice day.

Vytas.