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Wednesday, April 3, 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 13th of November is the lowest possible point for (gbp/jpy) drawing a trendline and the major correction point is the 26th 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 (13th of November) and the major lowest correction point is the 25th of February (day earlier than for the British pound). Now, for eur/jpy the trendline was broken even earlier than for the pound (17th of March) and the price went under the trendline (on the 21st 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 14th of March and failed to go beyond that. Euro Yen pair reached the lower high (the second peak) on the 11th of March and now is playing around with the lowest point that was reached during major correction (26th of 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 14th of 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 25th low). For gbp/jpy it would be a break of 137.81 (February 26th 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 (8th of March through the 1st 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. 


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