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One of the key goals of stock market traders is to find a way out of the maze of the stock market. Toward this goal, traders have resorted to using astrology, rocket science, fundamental analysis, technical analysis, and more to achieve this goal. The Fibonacci method is one such attempt to unravel the mysteries of the stock market, in this case by relating the market’s movements to the Fibonacci series. Fibonacci series were discovered long before there were stock markets, but they relate amazingly well to the stock markets and other natural phenomena.

When the stock gets close to a confluence level, traders should look for supporting evidence in order to act. Fibonacci levels like other indicators cannot be acted on in isolation.

The 60-minute chart of the Nasdaq composite in Figure 5 shows the confluence of levels at 2115, which acts as a strong support.

Figure 5: Nasdaq composite 60-minute chart

SHARK ATTACK

Now, here’s a strategy using the Fibonacci levels. The shark attack strategy details how retail traders are learning conventional, predictable theories in technical analysis and are not doing themselves any good. Haven’t you seen it happen?

Think of it. Whenever you position yourself for what you believe is a sure traditional setup, smart traders and institutions come in and move the market sharply in the opposite direction, coming in for the kill, much the way sharks do instinctively.
Leonardo of Pisa, a 13th-century Italian mathematician better known by his nickname, Fibonacci, is credited with the creation of the Fibonacci series. The series has its first two numbers as zero and 1. You arrive at the remaining numbers by adding the previous two numbers. For example,

0+1=1

1+1=2

1+2=3

2+3=5

3+5=8

5+8=13

8+13=21

13+21=34

21+34=55

34+55=89 and so on.

Thus, we arrive at a series of numbers: zero,1,1,2,3,5,8,13,21, 34, 55, 89.

These numbers are related to each other by a ratio. Many phenomena in nature, science, and astrology can be explained by using this property of the Fibonacci numbers. Fibonacci numbers also have an interesting relationship with each other. Using the sums from the examples above, we get 21/34 = 0.618; 34/55 = 0.618; 55/89 = 0.618. Similarly, 34/21 = 1.618; 55/34 = 1.618, 89/55 = 1.618. This ratio is known as the golden ratio and forms the basis of the Fibonacci methods in technical analysis.

The other two fractions, 0.382 and 0.5, most commonly used in technical analysis are calculated as follows:

(1 – 0.618) = 0.382 and 0.5 is the mean of 0.382 and 0.618.

FIBONACCI RETRACEMENTS

Fibonacci retracement tools are conveniently available in most software packages. To use it, we must:

Identify a swing high and a swing low in the price action.

Generally, use the 38.2%, 50%, and 61.8% values (Figures 1 and 2). If those values do not hold, 25% and 75% can also be used.

Look for supporting evidence along with Fibonacci retracements, such as extreme values in short-term relative strength index (RSI) or stochastics, or confluence of Fibonacci levels across time frames.

Focus on regions of support and resistance.

In very strong bull and bear markets, look for prices that often do not retrace more than 25-38.2%. In moderately bullish and bearish markets, prices can retrace up to 50-61.8%.

Finally, keep an eye out if prices start breaking the 61.8% to 75% retracement. If this happens, the main trend may be under threat.

Figure 1: Fibonacci retracements in an uptrend

Figure 2: Fibonacci retracements in a downtrend

Figures 3 and 4 display examples of Fibonacci retracement levels in upswings and downswings.

Figure 3: Fibonacci retracement levels in an upswing

Figure 4: Fibonacci retracement levels in a downswing

CONFLUENCE OF FIBONACCI LEVELS

With almost five Fibonacci levels to contend with, traders can often be confused. They are often left wondering which of the levels might most likely hold. In such cases,

The confluence of two Fibonacci levels measured from two different swing lows to the same swing high in an upswing is considered the most significant support level.

On the other hand, the confluence of two Fibonacci levels measured from two different swing highs to the same swing low is considered to be the most significant resistance level.
When the stock gets close to a confluence level, traders should look for supporting evidence in order to act. Fibonacci levels like other indicators cannot be acted on in isolation.

this, the shark attack is similar to the turtle soup strategy made popular by Larry Connors and Linda Bradford Raschke in their book, Street Smarts. That strategy is another example of how smart traders and institutions take advantage of retail traders using traditional setups who become trapped on the other side of the trade.

Figure 6: Short trade shark attack

Figure 7: Short trade shark attack

The third possibility is the shark attack that is, the market breaks its previous top and rallies between 1.272 and 1.618 of the previous correction, which is point 3, and retail traders go long with it.

After this, a sharp decline takes place, taking the market down to at least 1.272 of the last rally. At that point, pressured retail traders scamper away, and should prepare for shark attacks whenever traders act in a bullish or bearish consensus, expecting a breakdown or breakout.

The short trade can be taken when the low of the previous bar is broken and the second higher high can be used as the stop-loss. The profits on the short side can be 1.272 times the difference of point 3 and point 2.

The converse is true for the long trade. Assume the market is in a downswing and makes a swing low at point 1, and retraces upward to point 2. You should wait for the market to test the previous bottom.

The market could either form a double bottom and rally sharply or break the previous bottom and continue to decline to point 3.

Figure 8: Long trade shark attack

Figure 9: Long trade shark attack

Once again, another possibility is the shark attack, which occurs when the market breaks its previous bottom and declines to about 1.272 and 1.618 of the previous correction (point 3), making retail traders go short with it. After this a sharp rally takes place, taking the market up to at least 1.272 of the last correction, as once again, pressured retail traders scamper away and cover their short positions.

The long trade can be taken when the high of the previous bar is broken and the second lower low can be used as the stop-loss.

The Elder-rays combine the properties of trend following indicators and oscillators. They use 13-EMA (13 is the best period) as a tracing indicator. The oscillators reflect the power of bulls and bears. To plot the Elder-rays three charts should be used: on one side, the price chart and EMA will be plotted, on two other sides bulls power oscillator (Bulls Power) and bears power oscillator (Bears Power) will be plotted.

In interpreting the moving average, we are most concerned with its slope. When the slope rises, the crowd is becoming more bullish. When it falls, the crowd is more bearish. Clearly, the best course of action is to trade in the direction of the EMA. The high of the consensus of value occurs when bulls cannot lift prices any higher, thereby reaching their maximum power. And the low represents the lowest value to which the bears are capable of pushing the price, thereby reaching their maximum power. So the low shown on the daily bar is the maximum power of bears for the day; on the weekly bar is their maximum power during the week, and so forth.

By measuring the distance from the bar’s high to the EMA, bull power represents the capacity of bulls to push prices above the average consensus of value (price). Bull power rises when bulls are stronger and falls when they are weaker, even becoming negative when they are utterly weak. Bear power, by contrast, is the capacity of bears to push prices below the moving average. The distance between the low and the EMA, which widens when the bears are weaker and narrows when they are stronger, gives this figure. Bear Power is typically negative, so if it turns positive, the bulls have taken complete control.

Elder-rays are used both individually and together with other methods. If using them individually, one should take into account that the EMA slope determines the trend movement, and position should be opened in its direction. Bulls and bears power oscillators are applied for defining the moment of positions opening/closing. The following positions should be opened:

Signals to buy (in brief):
there is an increasing trend (determined with the EMA movement);
the Bears Power oscillator is negative, but increasing at the same time;
the last peak of the Bulls Power oscillator is higher than the previous one;
the Bears Power oscillator increases after the Bulls divergence.
At the positive values of the Bears Power oscillator, it is better to keep back.

There are two absolutely essential conditions that need to be in place for traders to consider buying: 1) the weekly trend should be up, and 2) bear power, as represented on Elder-Ray, should be negative but rising. The second condition – negative bear power – is worth exploring. The opposite condition, in which bear power is positive, occurs in a runaway uptrend, a dangerous market environment for trading despite the apparent strength of the trend. The problem with buying in a runaway uptrend is that you are betting on the greater fool theory, which states that your profit will be realized only by eventually selling to somebody willing to pay an even higher price.

When bear power is negative but rising, bears are showing a bit of strength but are beginning to slip once again. By placing a buy order above the high of the last two days, your stop order will be filled only if the rally continues. Once you have gone long, you can protect your position with a stop below the latest minor low.

Bullish divergences between bear power and price (average consensus of value) represent the strongest buy signals. If prices fall to a new low but bear power shows a higher bottom, prices are falling and bears become weaker. When bear power moves up from this second bottom, you can comfortably buy a larger number of shares than you typically would in your usual position. (See Getting Confirmation With The Momentum Strategy and Momentum Trading With Discipline.)

You can also use Elder-Ray to determine the best time to sell your position. By tracking the pattern of peaks and valleys in bull power, you can ascertain the power of bulls. By stacking the peaks in actual price against the peaks in bull power, you can determine the strength of the uptrend – if every new peak in price comes along with a new peak in bull power, the uptrend is safe. When prices reach a new high but bull power reaches a lower peak than that of its previous rally, the bulls are losing their power and a sell signal is issued.

Signals to sell (in brief):
there is a decreasing trend (determined with the EMA movement);
the Bulls Power oscillator is positive, but decreases gradually;
the last trough of the Bulls Power oscillator is lower than the previous one;
the Bulls Power oscillator decreases leaving the Bears’ divergence.

Do not open short positions when the Bulls Power oscillator is negative. Divergence between the Bulls and Bears Power and prices is the best time for trading.

If bull power is already negative, selling short is inappropriate because bears have control over the market bulls. If you short sell in this condition, you are effectively betting that bears have sufficient strength to push bulls even farther under water. Furthermore, as in the case discussed above, wherein the trader holds a long position during positive bear power, you are betting on the greater fool theory.

When bull power is positive but falling, the bulls have managed to grasp a bit of strength but are beginning to sink once again. If you place a short order below the low of the last two days, you receive an order execution only if the decline continues. You can then place a protective stop above the latest minor high.

In summary

Elder-ray indicatoris the most popular method of estimating power struggle between the bulls and the bears. It was developed and described by technician Alexander Elder. Elder based the indicator on the following premises:
The moving average is the agreed-upon price between the sellers and buyers during a certain period of time;
The maximum price reflects the maximum power of the buyers during the day;
The minimum price reflects the maximum power of sellers during the day.

On the basis of these premises, Elder defines the bull power as the difference between the maximum price and the 13-day exponential moving average (H-Ema). The bear power is the difference between the minimum price and the 13-day exponential moving average (L-Ema).

As we know the Frankfurt market opens at 2:00 am EST (which is 7:00 am GMT), then an hour later the other giant – London market opens at 3:00 am EST (which is 8:00 am GMT). The European session is the first major session for each coming day.

So, what do we do?
We start with 1 hour time frame, preferred pair – GBP/USD and no indicators.
The price range we are going to focus on is from 1:00 am EST to 2:00 am EST.
We look for the highest high and the lowest low of the price in that range and simply draw parallel horizontal lines through those extremes that will create a tunnel.

Now we are ready to move to a smaller time frame – 5 minute chart – and watch for the whole 5 min candle to close outside the tunnel which will provide a signal for us to enter with the open of the next candle.

We use a 20 pip stop OR the other side of the tunnel – whichever is less.

We are aiming at at least 20 pips profit. After that we have several options: lock the profit in, start “chasing” the price with a trailing stop by placing the stop just below the lowest low of the previous 5 min candle, or simply exit within the three consecutive hourly candles from the moment the trading order was filled.

Channels in Forex Trading – Channels are lines that are created on a chart to show the range in which a currency has been trading over a certain amount of time. They are extremely easy to produce. By looking at the chart over a time period, you simply draw a line connecting the relative high point trading prices, and another line below it connecting the relative low point trading prices. What you’ve done is produced a visualization of the trading range that has been occurring over the time period in question, for example six months.

Channel Breakout – When the price of a currency rises above the top channel line, this is an upwards channel break. Conversely, if the price of currency falls below the bottom channel line, this is a down side channel break. Channel breakouts can and do occur on the upside and downside. Through proper Forex training in technical analysis, anyone can use this method to develop a successful currency trading strategy.

It is important to construct the channels properly, as not every crossing of the lines becomes a true breakout. If the channel lines are made improperly, you often see trading outside of this range only to come back inside. That’s why it is very important before anyone starts Forex trading to complete a thorough Forex education

Managing Forex Channels Profitably – Once you get the knack of channels, you can start making significant profits. The important thing is to structure your trades with proper stops so that if you do get a false breakout signal, you have an acceptable loss or even perhaps a minimal gain. You’ll find that if you’re on the right side of a true channel breakout, any of the small losses that you’ve accumulated will be rapidly wiped out, and you will be sitting on a nice large profit.

Every serious Forex trading investor uses channel breakouts. If you are considering taking part in investing in currency markets, you should take the time to get some Forex training in this strategy and other technical analysis techniques, which will develop the currency strategies that produce successful results. Without putting time and effort on your part to fully understand the risks and rewards that any Forex trading strategy entails, you will not be able to achieve the results that you desire. Indeed, your profit is in your hands.

Entry rules: When Parabolic SAR gives buy signal and MACD lines crossed upwards – buy.

When Parabolic SAR gives sell signal and MACD lines crossed downwards – sell.
Exit rules: exit at the next MACD lines crossover or if the market starts trading sideways for some time.

- Tenkan-sen is the average value of the price for the first time interval calculated as sum of maximum and minimum for this period of time devided by 2;
- Kijun-sen is the average value of the price for the second time interval;
- Senkou Span A is the middle of interval between two above mentioned lines (Tenkan-sen and Kijun-sen) shifted onward on the value of the second time interval;
- Senkou Span B is the average value of the price for the third time interval shifted onward on the value of the second time interval;
- Chinkou Span is the closing price of the current candle shifted back on the value of the second time interval.

And we have 3 cases:

- if the price is inside the cloud (it means it is between Senkou lines) we have non trading market. In other words, we are not trading inside the cloud.
And Senkou lines are the support and resistance lines in this case.

- if the price is above the cloud the first Senkou line is the first support, and the second one is the second support respectively.

- if the price is below the cloud the first line (first from the price line) is the first resistance and the second one is the second resistance.

If Chinkou Span line is crossing the price curve from below to upward we have the signal to buy, and from above to below – signal to sell.

Kijun-sen is used as market trend indicator line (main line):

- if the price is above Kijun-sen line we have uptrend (most probably);

- if the price curve is crossing the Kijun-sen line the trend will be reversed (most probably as well).

Tenkan-sen line is crossing Kijun-sen line:

- from up to down – sell signal;
- from down to up – buy signal.

Tenkan-sen and Kijun-sen line are used to estimate the trendable and float market. If one of the line is going by the horizontal way we have float (non-trading zones).
Besides, Tenkan-sen is used as the reversed line to estimate the trend.

Thus, the Ishimoku indicator looks like trading system: all the lines are the middle of the price range for the some period of time and we may estimate the bullish and bearish trend and so on. And all the lines are re-acted instantly on the creating the new max or minimum within period of time – no delay.

In other words the Ishimoru indicator is of the complex trading system.

Well. But why we are not using this indicator right now?

Because some people say: “the settings of the indicator (9, 26, 52) are valid for the weekly charts only; and not for the forex; this indicator will not work on an other timeframes with the default settings; so it is necessary to have different settings for the different timeframes.

But anyway there are many people who are using this indicator with some good results. And they are using exactly default settings (9, 26, 52).

On the next few posts we will describe more about it but I want to say that if you are trading using Ishimoru indicator you will have 1 trade for 2 weeks on D1 or 1 trade per 2 days in intra-day trading. And most probably you will be in profit in 4 of 5 cases (it means 75%).

We said above that if Chinkou Span line is crossing the price curve from down to upward we have the signal to buy, and from up to down – signal to sell. But this Chinkou Span line should cross the line not in horizontal way. It should be at angle (45 or above is the ideal crossing).

Besides we mentioned about Tenkan-sen line is crossing Kijun-sen lines crossing: Tenkan-sen is crossing Kijun-sen from down to up – signal to buy (Gold Cross), sell signal is called as Dead Cross.

If the price curve crossed the Senkou Span B line (price candle should be closed before the line) we may open the order on the direction of the trend. But only in the case if Tenkan-sen line is not on horizontal level.

If Tenkan-sen line is on horizontal level – we have afloat market. We are not trading in this case.

And if we have Tenkan-sen, Kijun-sen and Senkou Span B lines are going in horizontal way above each other – it is reversed point. It means the price will change the direction soon.

If the price is inside the cloud together with horizontal Tenkan-sen – afloat market. Most of us will not trade in this case but some people are trying to trade inside the cloude understanding the cloud as the channel. It is possible only if the channel (cloud) is big enough.

So we have the signals to enter. But it is very important to exit in right way: T/P and S/L.

If we enter (open the order) on the direction to the cloud so most probably we will have 2 levels of T/P which are the Senkou Span A and Senkou Span B lines. S/L (stop loss levels) we will estimate using some other indicators.

If we are trading on the direction from the cloud the Senkou Span A and Senkou Span B lines will be stop loss levels (together with Kijun-sen line). In this case the profit level (T/P) will be in the place where Tenkan-sen line is changing the direction, or in some other place according to our evaluation.

It is necessary to say that Ishimoku indicator is using in candlestick charts and we are not trading in case of contradiction with candle analysis.

If the cloud was changed the color ( if the Senkou Span A and Senkou Span B lines were interchanged) we have the sign that the direction of the trend will be changed soon (will be reversed soon).

To trade inside the cloud (which should be big enoung) we are using Tenkan-sen line following the direction of the line and trading using Chinkou Span line signals: if Chinkou Span line is crossing the price curve from below to upward we have the signal to buy, and from above to below – signal to sell. In this case we will have stop loss levels out of cloud and profit levels will be the borders of the cloud. Thus, we enter using Chinkou Span, we have S/L levels somewhere outside the cloud, we have prit levels which are of the borders of the cloud. Or we may exit if Tenkan-sen line was changed the direction; if we have an other Chinkou Span line signal; if the price is crossing the one of the cloud lines.

The most strong signals for this indicator were observed on W1, D1 and H1 timeframes as the following:
- the price curve is crossing the Senkou Span B line breaking this resistance line;
- Chinkou Span line signals;
- 3 line signal (Tenkan-sen, Kijun-sen and Senkou Span B lines are going in horizontal way above each other);
- gold and dead crosses.

We will describe everything about this indicator. Step by step. In the next few posts we will know how to select the T/P and S/L levels on different timeframes practically, how to minimize the risks and which settings of the indicator we must select for the different timeframes.

some people also look for price to break above kijun for entry
not sure of timeframe for this method either and if they use that along with other signals from ichim

I think they are using all the signals together. As many as possible to minimize the risk. And they are waiting untill receive all the confirmation. But it is too late sometimes. Because very faint signal is coming the first, and then the more stronger signals are coming. I will try to describe everything that I know about time frame and settings of this indicator tomorrow. But may say that people are using not D1 only. H1 is very popular as well. Somebody said even about m5!
But D1 and H1 are more popular timeframe.

Many people understand the good trading systems as a profitability. Yes it is true. But Ishimoku indicator is the reliable system.

Ok. Thus how to estimate the stop loss and profit level? It is very important when we are working with this indicator as with a system to have 1 or 2 profit levels and one stop level.

There are 4 ways to estimate S/L levels.

First one is the technical method for S/L. It is for H1 timeframe only:

15 – 30 p on eur;
20 – 30 on gbp;
35 – 50 on jpy;
30 – 80 on chf.

The second method is mostly for D1 and W1 timeframe.
In this case we may estimate S/L using the cloud (behind the cloud) and something else (some strong support level of the indicator for example). And we will have S/L as big as 200 p (on W1) and 100-150 (on D1).

If we want to estimate S/L by the second method on H1 timeframe, we probably will have 40 – 50 on eur, 50 – 60 on gbp, 70 – 100 on chf and 60 – 90 on jpy.

The third method is always 15 p (on chf pair should be 30 p).

Probability to close the positions on stop loss is not less than:
- 40% if we are follow the trend on H1 timeframe;
- 80% if we are playing against the trend on H1;
- 50 or 60% in the flat market.

On the fourth method
we estimate S/L level using the cloud only (outside the cloud).

T/P level are estimating using the support/resistance lines or borders of the cloud. Besides, if the cloud is wide enough the 1st level of T/P may be in the middle of the cloud (if we understand the cloud as a channel).

The most stronger signals from this indicator we will have on MN and W1 timeframe. Good signals may be in H1 timeframe as well if the signal to enter is confirmed (if we are not using one signal from Kijun-sen only, we must use all the signals described above).

All the signals from this indicator are faint in case of H1 unconfirmed and M30 unconfirmed. All the signals from any other timeframes are super faint.

Risks

If you are playing with this indicator using 20,000 deposit having the rule not to open the order if S/L level is more than 2 or 5% of your deposit (daily) you are not risky man.

But as we stated above Ishimoku indicator is having the 4 signals which are not equivalent on strength. In most cases the first signal will be most faint and further signals will be more stronger. But the most stronger signal will be the last one. The probability of the signals to be real ones defers in 15 – 20 % from each other.

Thus the first signal is the most profitable but with the great probability to have S/L (for the order to be closed on S/L without profit). More risky.
Some people using 0.1 lot to open the order on the first signal and 0.4 for the most stronger signal.

On the D1 the settings is the classical one: 9; 26; 52. It is the best for D1 timeframe. For the H1 timeframe we may use: 120; 240; 480.

There are other settings:
- 6-12-24 (H1);
- 72-144-288 (M5);
- 12-24-120
- 12-60-120.

But it was seminar in Moscow in 2002 about Ishimoku and MACD and some people suggested to use 9; 26; 52 for D1 and 120-240-480 for H1 only.

But as a conslusion I may say the following settings:
M5 72-144-288
H1 12-24-120 or 120-240-480
D1 5-10-20 or 9-26-52
W1 9-26-52

But the most profitable and stable results were using the 9-26-52 on D1 and 120-240-480 on H1.

lowphat, may be 8-22-44?
Just 8 instead of your 7.
May be.

All that I posted above about ishimoku was the information which I collected from the different sources basically from russian sources.
Because as I know that:
- not everybody understands russian language and
- there is the problem with communication between the people from the different countries (russians do not want to speak english sometimes and most of us do not understand russian language, or japaniese language for example).
So I just collected.

It is not the strict rule how to use ishimoku or some scientific report.

It is the information only to have everything in one place.

Trading using Ishimoku is not simple way. I know that there are many trading schools to teach the students how to trade using this great indicator.

Thus I posted very preliminary information.

In Japanese, “sen” means line.
“Tenkan” means conversion.
“Kijun” means average or standerd.
“Senkou” means faster, and “chinkou” means later.

Some traders say he only uses Ichimoku, dosen’t need other indicator.

A Japanese charting technique developed early in 20th century is enjoyng renewed popularity”
Ichimoku Charts by Ken Muranaka

So Ichimoku is the Japanese tradition. Strongly recommended.

I am not joking about the tradition. Do you know how difficult to receive the information about Ichimoku trading strategies? Very difficult. There are few book and articles and few people only in Western countries and in Russia are trading professionally using this indicator. Because Ichimoku trading strategies are based on the trading experience and practics. Some people call it ‘trading secrets’. There are many trading strategies based on this indicator and many of them in Japanese language. And I am not ready to understand this language yet.

I know that this indicator was not developed for the forex. It was adapted to the forex market. Muram, if you are able to get some information in Japanese please share with us (in English). Simple description will be enough.

Chinkou span value is the close price of the current candle shifted some period back (26 in default settings). It is 26 days in D1 . It does not matter how many hours back. It depends on your setings of the indicator.

It this line is going to uptrend crossing the price (11 hours ago or some hours ago – does not matter) so we have buy signal. If we look at this indicator we will understand that this line may cross the price. Not current price. Just a price which was 11 hours ago for example.

This Chinkou span line is crossing the price curved line. Not the current price.

And about the settings. If I change the Kijun-sen from 26 to 1 for example I will have the following (see the image). Chinkou span line is inwhite color.

Ichimoku Indicator

But it is necessary to have all the signals. Not one only. There are many signals are coming: some of the signals are the coming first, some signal is the last one. Last one is strongest signal.

During the weekend I am always attaching the Ichimoku indicator to the daily and weekly charts trying to analyze the future possible direction of the price.

It helps a lot.

I am looking to the Ichimoku chart trying to understand where EURUSD will go to.

Future possible uptrend.Tenkan-sen (red line) was crossed Kijun_sen (blue line) showing uptrend in the near future. We got this buy signal on the full closed bar on D1 timeframe. But this first signal is very feeble. We will have more strognger signal if Chinkou Span line will go up crossing the price. Chinkou Span line (white line) came a short way off the price ready to go up. But did not cross the price yet.

Future possible downtrend. On the other hand, according to the Ichimoku chart the EURUSD is still on downtrend now. We have Senkou Span B line on the way to the price if uptrend (Senkou Span B line is the border line of the cloud). This Senkou Span B line is the nearest resistance line. Besides the price is located below the cloud.

Trend Reversal. According to the cloud we exect uptrend to be established in 15th of March. I mean finally established uptrend. But this situation may be changed.

Flat. Tenkan-sen, Kijun_sen and Senkou Span B lines are on horizontal way. Flat. But the situation may be changed very quickly because Chinkou Span line is not fully following Tenkan-sen, Kijun_sen and Senkou Span B lines.

So, irrespective of the buy signal the situation is not very clear and probably any news will affect on the price movement now.

Yet as John Bollinger was first to acknowledge, “tags of the bands are just that – tags, not signals. A tag of the upper Bollinger band is not in and of itself a sell signal. A tag of the lower Bollinger band is not in and of itself a buy signal”. Price often can and does “walk the band”. In those markets, traders who continuously try to “sell the top” or “buy the bottom” are faced with an excruciating series of stop-outs or worse, an ever-mounting floating loss as price moves further and further away from the original entry.

Perhaps a more useful way to trade with Bollinger bands is to use them to gauge trends. To understand why Bollinger bands may be a good tool for this task we first need to ask – what is a trend?

Trend as Deviance
One standard cliché in trading is that prices range 80% of the time. Like many clichés this one contains a good amount of truth since markets mostly consolidate as bulls and bears battle for supremacy. Market trends are rare, which is why trading them is not nearly as easy as it seems. Looking at price this way we can then define trend as deviation from the norm (range).

At the core, Bollinger bands measure deviation. This is the reason why they can be very helpful in diagnosing trend. By generating two sets of Bollinger bands – one set using the parameter of  “1 standard deviation” and the other using the typical setting of  “2 standard deviation” – we can look at price in a whole new way.

In the chart below we see that whenever price channels between the upper Bollinger bands +1 SD and +2 SD away from mean, the trend is up; therefore, we can define that channel as the “buy zone”. Conversely, if price channels within Bollinger bands –1 SD and –2 SD, it is in the “sell zone”. Finally, if price meanders between +1 SD band and –1 SD band, it is essentially in a neutral state, and we can say that it’s in ”no man’s land”.

One of the other great advantages of Bollinger bands is that they adapt dynamically to price expanding and contracting as volatility increases and decreases. Therefore, the bands naturally widen and narrow in sync with price action, creating a very accurate trending envelope.

A Tool for Trend Traders and Faders
Having established the basic rules for Bollinger band “bands”, we can now demonstrate how this technical tool can be used by both trend traders who seek to exploit momentum and fade traders who like to profit from trend exhaustion. Returning back to the AUD/USD chart just above, we can see how trend traders would position long once price entered the “buy zone”. They would then be able to stay in trend as the Bollinger band “bands” encapsulate most of the price action of the massive up-move.

What would be a logical stop-out point? The answer is different for each individual trader, but one reasonable possibility would be to close the long trade if the candle turned red and more than 75% of its body were below the “buy zone”. Using the 75% rule is obvious since at that point price clearly falls out of trend, but why insist that the candle be red? The reason for the second condition is to prevent the trend trader from being “wiggled out” of a trend by a quick probative move to the downside that snaps back to the “buy zone” at the end of the trading period. Note how in the following chart the trader is able to stay with the move for most of the uptrend, exiting only when price starts to consolidate at the top of the new range.

Bollinger band “bands” can also be a valuable tool for traders who like to exploit trend exhaustion by picking the turn in price. Note, however, that counter-trend trading requires far larger margins of error as trends will often make several attempts at continuation before capitulating.

In the chart below, we see that a fade trader using Bollinger band “bands” will be able to diagnose quickly the first hint of trend weakness. Having seen prices fall out of the trend channel, the fader may decide to make classic use of Bollinger bands by shorting the next tag of the upper Bollinger band. But where to place the stop? Putting it just above the swing high will practically assure the trader of a stop-out as price will often make many probative forays to the top of the range, with buyers trying to extend the trend. Here is where the volatility property of Bollinger bands becomes an enormous benefit to the trader. By measuring the width of the “no man’s land” area, which is simply the range of +1 to –1 SD from the mean, the trader can create a quick and very effective projection zone which will prevent him or her from being stopped out on market noise and yet protect his or her capital if trend truly regains its momentum.

The particular day of the week was chosen because on Wednesday the rollover is tripled compared to normal days (Sunday and Saturday interests fall on Wednesday). It’s unknown why AUD/JPY, a pair with a traditionally positive rollover interest, is sold 1-2 hours before the overnight swap is applied. Perhaps, traders (hedge funds) with big bullish positions prefer this time to partially close their positions without bothering the markets too much.
Features

• Fundamental base for trading.
• Very simple strategy.
• Statistically perfect.
• Only one trade per week.
• Jump-like changes in the interest rate may affect it.
• Strategy Set-Up
• Trade only on Wednesdays.
• Open an hourly chart of AUD/JPY pair.
• Entry Conditions
• At 15:00 EST (GMT-5 or GMT-4 during daylight saving time) open a Short position.
• No stop-loss or take-profit.
• Exit Conditions
• When the new bar opens (16:00 EST) close your position.

Warning!
Use this strategy at your own risk. forex1971.com can’t be responsible for any losses associated with using any strategy presented on the site. It’s not recommended to use this strategy on the real account without testing it on demo first.

The carry of an asset is the return gained by holding it. For instance the carry on a Treasury bond is the interest received. The carry of a bar of gold held at a bank safe is negative, since the owner gains no positive return, but has to pay the bank a fee in return for the perceived security of the asset. Let us note that “carry” is unrelated to the speculative appreciation or loss on the asset value, but is the merely the opportunity cost of owning the asset, positive or negative. In the case of currency trading, the carry is the interest return on the position as it rolls over to the next day. By shorting a currency with a low yield, and paying the negative but negligible carry return, and buying one with higher yield, the trader aims to make a profit which is then multiplied by leverage.

The most popular pairs for carry trading are: NZD/JPY, USD/TRY, AUD/JPY, AUD/USD, EUR/JPY and BRL/USD. There are other, more volatile, less liquid pairs that are offered by various brokers, but the beginning trader can at first confine his activities to the most liquid ones above.

Before moving on, we should note here that there are two kinds of situations that lead a central bank to maintain high interest rates, and only one of them constitutes the ideal conditions for the carry trade. These two situations are not in fact independent, but to make matters simpler for the forex trader, we will examine them as if they were. In short, central banks raise rates in response to the risk of both inflation and capital shortage. In the case of capital shortage, the central bank aims to stem capital flight out of a nation’s financial system, and it raises the main interest rate to lure investors and speculators to deposit funds in the nation’s banks.

In the case of inflation, the central bank raises rates because there is too much money floating around in the economy, and by raising interest rates it aims to make the cost of borrowing higher, squeezing liquidity out of the system, contracting money supply, slowing the economy down and reducing the risk of inflation.

Of these two scenarios, the trader should only be interested in the inflation-induced one where capital flight is not a problem for the foreseeable future. Attempting to carry trade in an environment where interest rates are going up because of capital flight and panic is an extremely risky endeavor, and should be avoided as much as possible, unless the trader knows what he is doing, is very knowledgeable about the financial status of the country, and is comfortable with the risk he’s taking and the capital he allocates. Not only does capital flight increase the frequency and duration of volatility, but it also has the nature of a feedback loop, in which the situation deteriorates with great speed, and with little warning.

Carry trades depend on the principle that the interest rate differential between two currencies can be amplified by the successful usage of leverage, and that during periods of low volatility, the amplified profits can be compounded and reinvested to create massive returns over the longer term. If you have any experience with currency trading, you are already aware that the carry of an unleveraged account is usually minuscule, and it’s not possible to achieve meaningful returns unless you are willing to wait for a number of years. By utilizing leverage the carry trader aims at quicker profits, and justifies his choice on the premise that he’s always on top of his brief with respect to market developments, and will not be caught in the dark when there are periods of serious, but usually temporary shock and panic.

Since higher yields also attract capital and cause the currency to appreciate against its competitors, the returns are not limited to the leverage-enhanced interest gains that the carry account accumulates. The permanent gain in interest income actually allows the account to react to currency price fluctuations better by adding an interest income generated buffer zone to absorb them. Nonetheless, our general suggestions on sensible practices are valid in carry trading too: leverage higher than 10 is not really advisable, and one should never risk more than his risk capital.

The carry trade is sometimes advertised as a trade based on fundamental analysis in that higher interest rates indicate healthier economic growth, while steady capital flows reflect the underlying strength of the higher yielding currency. Nonetheless, on closer examination, we may not be very convinced by this argument. We know that the carry trader will long high-yield currencies such as the Turkish Lira, or the Australian dollar, and short those such as the Japanese yen, or the Swiss Franc. What do we notice in this type of currency allocation? First of all, many of the lower yielding currencies are reserve currencies as a result of their higher technological advancement and status as financial centers. Secondly, because nations raise interest rates, in many cases, to attract capital, they are likely to suffer higher volatility at times confusion and crisis. Third, the majority of high-yield currencies are issued by emerging markets where political instability is more frequent than it is among more advanced nations.

These observations should alert us to the fact that the carry trade sometimes entails trading against the fundamentals of the currency pair. Buying the currency of a nation with large deficits can hardly be said to be a safe and sound practice, but it may be profitable if there are too many people engaging in it. Similarly, shorting a currency backed by healthy surpluses is not safe under usual circumstances, but government policies, market behavior, and the general economic conditions may, at least on a temporary basis, reverse this rule. The carry trader follows the trend, and in that sense this method is more related to technical than fundamental analysis. There’s nothing wrong with that per se, but it is wrong to have false confidence based on the misleading association between high interest rates and economic strength.

Finally, we should remember that the carry trade is a directional bet. The trader basically forms his opinion, and acts in accordance, without giving much attention to the aspects of hedging or diversification. Since, at least during the past decade, the major carry trade pairs such as USD/TRY, NZD/JPY, GBP/CHF, or EUR/JPY all reacted in a highly correlated manner to fundamental shocks, an account that consists mostly of positive carry generating pairs cannot be thought to have diversified successfully. It is advisable that the trader either keep his leverage low, or hedge through the addition of some negative carry pairs into his portfolio, whichever he finds more comfortable.

The currency carry trade reached the bubble stage over the period between 2001-2008. As Japanese and Asian savers, tax haven-based large hedge funds, and other investors from all walks of life participated in this lucrative activity, at one point the amount of money invested was estimated as high as 1 trillion US dollars. Today the carry trade is still alive and well, but at a quite smaller scale than in the past as a result of the well-known global economic turmoil of 2008. Some of the highly leveraged players such as the aggressive hedge funds have been wiped out during the oil collapse and the successive waves of deleveraging that followed it, but those who were quick to cash out and realize their returns did indeed leave with tremendous profits. And of course we should not forget the massive gains registered even before the financial crisis began in the autumn of 2007. The carry trade did indeed create millionaires of those who were prudent in their choices, and relatively quick in their reactions.

Here are a number of principles that the carry trader can keep in mind:

Follow all the rules of sound money and risk management. Carry trade is just another aspect of currency trading, and all the rules of the latter are valid here too.

Carry trades are very sensitive to periods of insecurity and confusion. Anything that threatens stability and GDP growth is likely to be detrimental to the carry trade, even if the relationship is elusive at first glance. Hurricane Katrina caused a lot of disruption even to non-USD based carry trades, and the difference between stability and instability is often only a function of trader psychology.

Do your research and understand the economy of the currency which you trade. Are you comfortable with the nation’s deficits, its development strategy or the risk level it poses to your portfolio? Manage your leverage in accordance.

Since we desire to minimize the impact of short term fluctuations on our portfolio, the interest bearing positions must be open for months, at the very least. The carry trader must have a long term vision in order to avoid the temporary impact of volatility on the account.

Analyzing the historical volatility of the high-yield currency, examining the usual speed and range of its reactions to important economic events of the past can be very helpful in determining the stop-loss point of the trade. For instance, during the period of 2000-2007 the Norwegian Kroner, despite its fundamental strengths, was prone to react in somewhat stronger percentage terms to news shocks and market volatility in comparison to the behavior of other currencies. Similarly, the Turkish lira, while stable most of the time, could be extremely volatile in reaction to banking sector problems. The trader should make sure that he is prepared for such periods, at the very least on a mental basis.

The trader should be aware of developments of international scale. The health of the carry trade, volatility, and liquidity of the market all strongly depend on the health of the global economy, and the phase of the business cycle. Carry trades can enter long, deep periods of liquidation in response to global shocks, as in the aftermath of 1998 Asian crisis, or the turmoils of 2008. It is therefore a good idea to be up-to-date with the fundamental developments.

On a concluding note, let us remind you that the carry trade is a proven long-term strategy that has the potential to create spectacular returns for the patient, impassionate and diligent trader who is not afraid of realizing profits or taking losses when events, backed by fundamental analysis, dictate that he do so. The carry trade is a trend following strategy, and requires little sophistication from the trader in order to be successful. But it is very important to have a clear idea on what you expect from your carry trading account. Are you confident about your analysis that you’re ready and able to ride out temporary, but severe shocks in return for long term gain? Or are you holding the position overnight to realize short terms returns and exit with quick profits or losses? Your responses to these questions, along with your analysis of the global economic environment, should guide your choices with respect to this popular, proven and profitable trend-following strategy.