These talks are not going well. According to some sources, the Greek government has proposed an even larger “haircut” of 68%, meaning a recovery rate of only 32 cents on the Euro. In addition, future interest payments would be lowered, too. There are plenty of conflicting stories, with some suggesting that the original 50% threshold is still valid. We shall see. Whatever it turns out to be, Greece is simply strong-arming, even blackmailing its creditors into taking losses, with only faint hope of actually recovering anything. According to Fitch, Greek default is inevitable and only a matter of time, and any talk to the contrary, including these negotiations is just posturing.

While that farce is playing out, trading goes on no matter what it actually is that drives the markets. In the last post, I discussed a buy in the GBP-JPY. The premise was to go long on a breakout above the latest minor high, with the exact entry at 118.33 and objective of 100 pips. That is what happened, the beast rallied with most of the gains taking place on Thursday. Perhaps this is a start of larger appreciation, but for that one should use the 4H chart, something I will look at later.

Another trade I covered earlier this week was in the EUR-NZD. Here I used the intermediate term chart, which formed a divergence with the MACD. Still needed a bullish candlestick reversal pattern, though, in order to pinpoint the entry. After a considerable wait, an engulfing line developed, providing entry at 1.5927. My objective was 200 pips, which was reached, if just. Later in the day, the EUR-NZD made another run at the high. For Friday, I will focus on short-term at the start of London session, using USD pairs.

Mike K.

If indeed sense of crisis prevails, currencies will react strongly, with the US Dollar in the center of it. Only, what will happen to the USD? Following first downgrades of Greece and other European countries, the Euro sold off, so, if that is any guide, one would expect the Dollar to fall too. Of course, the most recent downgrades in Eurozone produced no reaction at all, making it difficult to use the common currency as a comparison. However, the prevailing “wisdom” implies that the Dollar should move lower.

On the other hand, a rating cut should mean, at least in theory, that the affected country needs to raise interest rates to be able to finance its borrowing needs. That, in turn, could make the USD more attractive to hold and less suitable as an instrument to finance the carry trade, thus causing it rise rather than fall. In fact, holders of treasuries might be delighted that rating agencies are finally getting tougher with Washington. This outcome is just as viable as a sell off in the Dollar.

Finally, we should not discount the possibility that, outside of bombastic and fear mongering headlines, exactly nothing happens. After all a one notch downgrade by only one rating agency is not even a slap on the wrist, but only a warning, without real consequences. Just look at what happened after the S&P cut of Japanese rating to even lower AA- from AAback in January. Nothing. In my personal opinion, the biggest threat to markets right now is not the action of Standard and Poor’s, but the heated speculation surrounding what happens next, because that can withdraw liquidity and create conditions ripe for excessive moves. People with accounting certifications know not to get too caught up in speculations.

Taking a step back from immediate concerns, the AUD-USD may have reversed its long-term uptrend. It is not confirmed yet, but there are a few reasons to take such view. A double top seems to be in place, supported by a divergence with the MACD. I addition, the price closed under the 100 SMA and dipped under the previous low 0f 1.0390. All this is bearish for the Aussie. I am looking for a small rally from here, followed by a selloff. At that point 1.0370 will become the entry level for shorts.

Following good trades in the NZD-USD last week, I will stick with this pair for now.  On the daily chart it does not look as bearish as the AUD-USD, but a shorter-term graph may offer selling opportunities. One possible entry is at 0.8270, but because the price is bouncing now, another possible trade could form sooner. I would like to see  a rally to about 0.8600 and then look for bearish candlestick reversal patterns using either 4H chart or 8H chart.

It will probably take a few days for these trades to happen, but that is on purpose – I want to avoid premature entries (faulty) entries if the opening is indeed as volatile and unpredictable as many expect. There could be a silver lining to it, though – gaps. Should they form, I will engage in short-term trading. BTW, I still intend to buy CHF pairs on breakouts above minor highs on hourly charts:). Have a great trading week!

Mike K.

Obviously, simply buying or selling breakouts does not guarantee profitability. Quite often the price get stopped at these levels. They are always known in advance and attract orders going betting both ways. Some traders want to join in, following the direction of the breakout, while others will look for reversals and place orders accordingly. It is impossible to know in advance who will prevail. Even if one could see an order book from one of the dealers, it is of little help. The Forex market is so fragmented, that whatever insight is possible to have access to, represents only a very small portion of all orders placed. Besides, many traders will be joining the action in progress with markets, which might skew the balance and render the order book useless.

This brings on an important question – should you trade breakouts, or fade them? Since the success/failure rate is about 50/50, can it be decided on the fly, as the action unfolds? There are some practical difficulties to this approach, because both strategies are based on slightly different principles. It is the matter of confirmation, or waiting for the bar, during which the event occurs, to close. For our purposes here a price bar and a candlestick are synonymous.

In this example, the resistance is at 1.5935. A typical order either a buy (trading the breakout) or a sell would be placed a few pips above it. Unless, of course, one would wait for a confirmation, in shape of a completed candlestick, during which the breakout happens. This carries different risks for either of the approaches. Those buying this breakout might miss a big part of the move, thus missing out on potential profit, so waiting for a confirmation might be counterproductive.

This does not happen all the time, but when trading breakouts we can not afford to keep missing such large parts of the move. Which means, the order should be placed close to the resistance, rather than waiting for the confirmation. But that would not work for fading it. That trade would be massively in the red, if entered at the resistance. On the other hand, waiting for a confirmation, would keep a seller here safely away from a losing trade.

It is always possible to trade a breakout when it happens, with the intention to stay in the trade until designated objective is reached, but be prepared to switch position immediately, if the breakout candle reverses. This approach demands waiting for the candle to close and then making at quick decision at that time.

In this example, the price penetrated the breakout point, but that candlestick closed below the entry point, assuming a bearish form. That could have given a signal to fade the market, thus forcing a reverse in position. While this approach would work, this is a hand picked chart, just to illustrate a point. In most cases the initial breakout bar is not that clear, and one could get easily discouraged, or even lose a lot of money constantly taking these double trades. On the plus side, this is the precise situation for fading the market on a failed breakout.

What is one to do? Probably the best solution for a trader is to know what he/she wants to do before a breakout situation and be committed to either go with it or try to fade it, and avoid choosing while the process is under way. Neither approach is necessarily better than the other over time, but one still has to decide which to do. After all, it is hard enough to become consistently profitable doing one thing.

Mike K.

Head and shoulder pattern, the crown  and their derivatives are among the most well know reversal patterns and cover a broad range of shapes the price makes when direction is about to change. On occasions, though, market movements are simpler and do not fit into any of these formations. They simply fail to make a new high/low, after which a reversal takes place. In a basic form, this is called a 1-2-3 pattern. As the name implies, it only has three components. I call it the “End of the trend” strategy.

For this formation to develop there must be a trend present. In an uptrend, the market makes a new high (1), followed by a pullback (2). This correction establishes a minor low.  Then the price makes another attempt to make a new high (3), but fails, the price reverses and falls under the just formed minor low, which is a sell point, in anticipation of more downside.

The opposite happens in a downtrend. A new low is established (1), followed by a correction (2) and a failed attempt to make a new low (3).  When the price moves above the just created minor high (2), a buy order is executed. The set up is very simple and straightforward. More importantly, it is easy to identify while forming, happens often and is present on all time frames.

Here is an example of the “End of the trend” strategy (or 1-2-3) on a 15M chart of GBP-USD. After a downtrend, the price makes a new low (1), bounces (2), and then fails to reach another low (3). This sets up a reversal, pushing the price way above the minor high (2), where the buy point should be.

The RSI indicator is used as a filter, or a qualifier for the set up. In order to cut down on false signals, one wants to see the original low (or high), which starts the set up (1), to happen when the RSI is oversold (overbought for a sell). Any other indicator could be used, but the RSI seems to work well for the purpose.

What is the objective for this strategy? Number of approaches can be employed. One of them is the use of Fibonacci projections. The 100% extension of the distance between (2) and (3), past the buy/sell point seems to be working well. In other words, number of pips between pints (2) and (3), then added (for a buy) or subtracted (for a sell) from the entry point, provides the trade objective. This is demonstrated on the 1H chart of AUD-USD.

On the daily chart of EUR-USD, we can see two sets back to back, first a buy, followed by a sell. Both of these moves met the projected objectives. With some practice, the “End of the trend” strategy is easy to identify and implement, has a short learning curve and is surprisingly effective, considering its simplicity.

Mike K.

What makes tomorrow’s rates the decision even more interesting than typically, is rather precarious market position of the Australian Dollar. After making an all time high against the USD, the Aussie sold off sharply, just like most other currencies, when the Irish financial sector was ready to collapse. The AUD-USD dropped to 0.9535, before recovering substantially last week. This latest rally created a possible Head and Shoulders reversal pattern on the daily chart, and what happens in wake of the RBA rate decision could either confirm or deny this formation.

Currently the price of AUD-USD is in the general area where the Right Shoulder should form to confirm the S&H pattern.  One would what to see a daily candlestick in the form of a engulfing line, shooting star, dojis or a hanging man, one of the strong bearish reversal candles. If the rate decision is disappointing, such a pattern could be created here. Those trading H&S might use it as a short entry. Location is good, provides a tight stop and offers solid profit objectives. But if the Aussie moves sharply higher, this entire pattern might be rendered invalid.

While on the subject of the Australian Dollar, last post discussed a possible trade looking for a short term reversal, using hourly chart. The signal happened soon after the markets opened for trading (regular hours) and a sell took place at 0.9918. This trade was closed for a 55 pips proft within few hours, about as much as expected for this strategy.

Other pairs moved more, like the EUR-USD. There are a few brokers which allow trading a little sooner than the 5PM EST opening. Normally I do not do much during that time, as the spreads tend to be wider. But this time  it made sense to me to sell the EUR-USD early, because of the shooting star candlestick. That was exactly what I was looking for and risks were small, so the trade was on at 1.3416. It was closed  at 1.3346 for 70 pips gain. Will discuss the USD-CAD in the next update, but for now let us see what happens after the RBA rate decision.

Mike K.

It appears that this action was different than the one done by the Swiss National Bank earlier in the year, or for that matter what the BoJ did 6 years ago. In those instances central banks were dumping a lot of money in a matter of minutes, pushing the markets 200-300 almost immediately, causing gaps and wild spreads. This time around they opted for sustained, prolonged Yen selling in relatively small lots. Many FX dealers reported continued purchases of USD-JPY in 10M lots. If this is the case, Japanese authorities may be prepared to keep the pressure on for days, or weeks in order to make lasting changes. This sounds like a very expensive proposition and the time will test the measure of their resolve…

The Bank of Japan has a successful precedent of such action. Back in 1995 that was the method they chose to fight the surging Yen when it reached the all time high of just below 80 USD-JPY. From the perspective of time it can be said that the BoJ prevailed then, because that action started a prolonged bear market in Yen. In order to have similar results now, they must be ready to keep selling the Yen for a long time. What could help them, is the fact that JPY had started to show signs of weakening even before the intervention. Regardless, Forex traders are in for very interesting days, maybe weeks.

Couple of days ago I suggested a straddle trade in AUD-JPY, looking for a breakout either way. The sell side was not very impressive and closed yesterday, while the buy order was filled during the intervention. It was filled with one pip slippage and closed for 70 pips gain. One can see that the action was different than other recent interventions, because of the price movement. It was reasonably steady, if fast, without gaps. This one minute chart illustrates it better>

I was playing with short term strategies using Ichimoku charts, with an objective to buy EUR-JPY above the “cloud”. That is when the intervention started. My buy order was slipped few pips on the initial action, but after that it was smooth sailing. Spreads widened only a little bit. We can see the consistent upward momentum on steady buying of USD-JPY. Too bad these trades were of a small size, but the results made up for it.

Another trade in Yen was the CAD-JPY from last week.  That is what I mean by saying that the JPY started to crack even before the intervention. At any rate, this order was filled when the BoJ stepped in and made 100 pips. What happened last night creates a lot of uncertainty, so I decided to close all other trades which were mentioned on these pages – GBP-CHF, EUR-CHF and EUR-AUD. I will go over them in the next post. At this point, I plan only short term trades for the rest of the week, with small objectives, until the dust settles down.

Mike K.

One of those was a long in GBP-CHF, mentioned in Will the Pound rally continue? post. The set up was an upside breakout, above the resistance established at 1.6220, with my specific buy order at 1.6230. Objective was as much as 250 pips. After few days of waiting, this trade was finally filled yesterday at the intended level.

Today, on Tuesday, during the European session, this pair made a nice run and reached as high as 1.6370, before pulling back some. Since my trading was relatively flat recently, I decided to book the profits and closed the transaction just before the New York session at for 104 pips gain. From the perspective of the price action today, it was a good exit, but premature when compared to pre-trade objectives. This pair is still a buy, using 1H chart, for another 100-120 pips above today’s high.

Last week couple of trades in the EUR-CAD were discussed here, with the second one on the losing side. After that new possible entry was discussed if the price moved into a circled area and created a strong bullish reversal candle. That’s what happened on Monday. The EUR-CAD touched the 100 SMA, often a support, and formed an engulfing line, the buy signal. Entry took place at the open of the next candle, 1.3426. Decent rally followed and the trade was closed at the same time as the GBP-CAD, for 140 pips profit. Here also, more trades are sought using the hourly chart.

At the start of the week, a possible short trade in AUD-JPY was discussed. Price moved away from that sell point, so I looked for a short on that rally. Late Monday, this pair came close to the previous high and stalled. Since the risks were relatively small, I sold AUD-JPY at 79.09.

This trade was also held until just about New York session started. At that point, the gain was good, 82 pips, decent exit. Right now, the original sell order at 77.17 using 4H chart is still valid, but I will look for smaller down moves on hourly chart as well. So, Tuesday turned out to be a good day. With any luck, the rest of the week will be similar.

Mike K.

Lately focus of this blog has been on two of those pairs – AUD-JPY and CAD-JPY. Timing has proven to be correct for shorting them, with good results so far. Yesterday I had no time to post an update, but mission remained the same – selling Yen crosses and AUD pairs, too. This time I went for bigger targets, using 4H charts, still looking for simple breakouts. The Aussie-Yen in particular arrived at the low of “Flash Crash” from 2 weeks ago. Good place to short it.

The 76.80 low was breached briefly couple of times right after my previous trade here had been closed. I set that one out, which means that I had to lower short entry to 76.00, missing out on some pips. Move came early today and trade had an objective of 73.00. In the end, market went another 100 pips lower, but I was perfectly happy with my 300 pips. Expectation is for more downside from this pair, but how much lower? If there is no intervention 66.00-65.00 for this move is very realistic, but not tomorrow. If that goes, than perhaps even 55 is possible, but that is speculative at this point. I’ll be trading it with smaller objectives in mind, using either 1H or 4H chart, whichever one looks better at the moment. Right now I’d like to see some consolidation, a rebound, perhaps, but mostly a pause for at least few hours before any new trades are entered. Only short positions.

In CAD-JPY entry was on the move under 86.25. Objective was 82.00 but price hasn’t been achieved yet. Trade was closed at 83.67, as the move stalled. From now on I’ll be using hourly chart until the “Flash Crash” low is breached. We could see a support there, but if AUD-JPY is any indication, it will probably fail, even if it takes some time. Just trying to be a little cautious. When this support is broken, another 1000 pips slide could be possible. One step at a time, though.

Few days ago a sell in AUD-CHF was discussed. It worked out as planned, bringing 100 pips. With Australian Dollar seemingly in a free fall, I reentered soon after at 0.9717, with 0.9500 target. Things became a little rough soon after, when SNB intervened in Swiss Franc, but AUD was under such pressure, that it didn’t matter and price swiftly dropped to 0.9500. This snapshot was taken yesterday. Since then AUD-CHF sold off by another 200 pips. I had no more trades here. Few weeks ago a short trade in AUD-CAD using daily chart was covered on this. That trade was also closed yesterday and will be discussed in next update. So, for now, looking for more short trades in Yen pairs, even if some rebound should take place here

Mike K

The way JPY crosses are behaving reminds me so much of the summer sell off in 2007, and then the big one of 2008. The prices seem to be gaining speed as if rolling down hill. As a matter of fact this is happening right now, as I’m writing this. If things unfold the way they before, we are in for much more down trend with even more furious swings. What we have seen so far could be termed only the “beginning”. However, at this point it is only speculation on my part, not analysis.

I just got out of some Yen trades, on this move during Asian session, minutes ago, after this post was started. One was a little sooner, CAD-JPY short, which has been discussed here recently. Following failed trade (small loss) yesterday, I was looking for a price build up to maybe as high as 91.00 and try to sell on candlestick reversal using 4H chart. Here is what happened.

Market didn’t make it quite t0 91.00, but close enough. Once the bearish engulfing line formed, it was time to sell, with entry at 89.48. Objective was at 88.00 – just reached. At this point I’d like for the price to bounce back a little, for a few hours at least, and probably try to reenter if new lows are made.

As mentioned before, for the other Yen pairs, breakouts on the downside were signals to get in. AUD-JPY made a move at 79.93, or rather I made a move then. Just got out at 78.00. Very good trade. Can’t do proper analysis at the moment, since everything happened minutes ago, but Yen crosses will be covered here more in near future, expecting more downside. The other trade mentioned yesterday, short AUD-CHF is currently under way. More on that in the next post.

Mike K.

Japanese Yen pairs had very large moves for one day. They were comparable to what happened in 2008, during the famous “unwind” of carry trade and came to an end on what could be described as a blow out pattern. Blow out term is typically used to describe a top, but the reverse is also true. Often “exhaustion move” is used alternatively. Both terms apply to a situation when price advances, or falls at an accelerating pace, moving much more that most recent history. Chart takes on parabolic shape and eventually sharp reversal takes place, normally in one price bar (candle).

It doesn’t really matter what time frame is discussed, blow out, or exhaustion patterns, happen on all of them. What is important, is the length of trend preceding them, expressed in number of bars(candles) rather than specific length of time. Trend must be clearly defined, meaning that there is no question which may market is moving. Next, price movement must be gaining momentum, seemingly moving faster and faster. Eventually, one wants to see reversal candle, which preferably is the largest one in the series, or most recent history. The larger the trying to reverse, the higher the probability of real exhaustion taking place. 

That’s exactly what happened on Thursday with JPY pairs, best seen on hourly charts. Prices had been falling for some time, indicating downtrend. Eventually sell off picked up speed, for reasons which I’ll leave for others to sort out, culminating in a single candle of ridiculous size, especially considering relatively small time frame . This is how it looked like.

As the price started to break under recent lows, I took a short position here, with fairly large objective of 250 pips, expecting at least two days for this to happen, optimistically. Had absolutely no idea what was about to happen. Target was reached fast and then market collapse another almost 500 pips in one hour! Price started to reverse sharply, indicating probable blow out move. Once the candle closed, leaving size-able shadow behind, I went long looking for quick correction of 200 pips. It is obvious now that I was overly cautious, but it didn’t feel that way when things were unfolding.

Just how large was range for this one candle? In recent history, AUD-JPY fell this much only during the height of financial panic, in October 2008. And that was when Aussie was under pressure for weeks already and seemed like it became the proverbial “hot potato” – nobody wanted to hold it. Thursday price action was a perfect example of what “large” price bar is. 

Almost identical trade took place in CAD-JPY. Since I viewed CAD as a little stronger than AUD, target on the downside was smaller here, but larger on the corrective move.  In this cross hourly price range was absolutely impressive – larger than anything what happened in 2008.

Latest action produced hourly candle with a range of about 500 pips, much more that the 300 or so pips in October 2008, leaving no question that it is  “large”. With similar trades in GBP-JPY and EUR-JPY, panic moves in Yen proved to be very good, even if my trades were far away from perfect.

There are couple of things one should remember when trading blow out moves. They do not necessarily indicate longer term top/bottoms, or price extremes, but rather areas where price is likely to be corrected. Reactionary swings more than primary price action. This means that objectives should chosen accordingly maybe on a conservative side when comparing to the move causing it. Also, watching the tape provides additional clues about proximity of exhaustion point. How fast are quotes changing? What is the pip difference from quote to quote? Is there a “freeze” in price change at possible extreme point? These aspects are difficult to explain but can be learned through paying close attention to how action develops during times like these. Just like any strategy, this one can’t be learned overnight. But it’s worth giving a shot.

Mike K.