Henkos Forex TA

Update: EUR/USD and NZD/USD

2007-12-18T14:07:00.001-08:00

Hi readers,

Ok let's see how things have been moving since the last entries were made.

EUR/USD short position:

At this point the trade is only slightly into the positives, back up a little from yesterday.

My concern right now is the look of the two latest daily candles right at the end. They are both "inside days" which according to "candlestick"-analysis indicates a short-term trend change (ie. change against my short position). (For more info on inside days and candlestick reversals check-out this link: href="http://www.investopedia.com/articles/technical/03/020503.asp">) This puts me in a tough spot. The HS break downward tells me the price is moving lower, the inside day candle pattern tells me otherwise.

This gives me three options:
1 - I find that am neutral to the currency pair and close the position at a minimal gain
2 - I change my mind and reverse the position
3 - I hold onto the position

In general in this case I think it would be wise to hold onto this position. This is because the HS-formation has a technical indication with a much longer time frame than the inside day bullish signal. However, I am still going to move down the stop loss to make the loss minimal incase things go wrong. If I change to the 4-hour perspective, there is a top at 1.4452. Therefore I will move the stop down to 1.4460 and risk at most a 30 pip loss. This would mean that if the market acts on the short term candlestick pattern, I will get out of the trade. If that does happen there is always the possibility that I will get back in on the short side if the price goes back down.

NZD/JPY short position:

Not much has happened here since I entered the trade. The price was somewhat lower yesterday but is at about breakeven for me at this time. Lasts days candle doesn't reveal much other than that it is a halt in the drop from the upper trendline. We will have to wait and see what happens here.

I will get back to you soon

/H

NZD/JPY downwards trendline bounce

2007-12-17T04:32:00.000-08:00

Good Afternoon readers!

Today at around lunchtime (about 1 hour ago) I entered a short trade in NZD/JPY. This was due to a bounce at an upper trendline (ie. resistance) which will now hopefully force the price down.

Observe the following chart:

The black line indicates the downwards pointing trendline that the price has hit and started moving away from. That is the basis for this TA. The main supporting indicaor is in this case the stochastics indicator which seems to me to be pretty consecutive in indicating trendline bounces. Just like at the two prior peaks the stochastics has moved above and then back below the 80 value which indicates a downturn, especially when coupled with a trendline hit and a short-term downwards trend.

Also the price just crossed below both the 200 and 50 moving averages, both considered strong supports.

The only indicator going against this prediction is the MACD. As you can see it has broken its trendline and has reached a higher peak than the previous one, which should indicate a strengthening price. I however decided that the reliability of the stochastics is stronger in this case.

I entered this trade at 85.67 and placed a stop-loss right above 87.20 (the latest pivot point). This is quite a big stop but the NZD/JPY is pretty volatile so it needs to be. Since the setup is akin to a downwards sloping channel, I will make my price target right below the latest dip, right above 80.00.

Like always I will follow up with regular updates and more trades.

A quick update on the other active EUR/USD trade perhaps? Well so far it has been moving in the right direction although it has been very volatile. The trade is about 40 pips in the positives right now, but it changes every second so I will be back tomorrow for another update.

Good trading,

/H

Back with EUR/USD

2007-12-16T18:40:00.000-08:00

Hello readers!

School has been very busy lately and that's why I left this blog in hibernation for about a month. Now however, I am back with a EUR/USD trade. The USD has been going downhill for a long time now, but now I am entering a short position in EUR/USD based on the following technical analysis.

If you know the basics of TA you can probably see what I am getting at. The EUR/USD has completed and broken down through a Head and Shoulders formation. The first top is around November 7th followed by the first neckline dip, then follows the head-section all the way until the December 6th neckline dip, then the formation is completed with the last shoulder and finally the break of the neckline last friday.

What a downside break of a HS formation is supposed to indicate is that a long-term trend has come to an end and changed direction. This breaks one pretty basic TA rule which is that following the prevailing trend is a good thing, (the trend is your friend), and I believe this to be true. But a HS-formation is supposed to indicate a situation where an exception should be made. Also that a trend change occurs for technical reasons at this point makes sense because the price action reached a symbolic level of $1.5 per EUR (and symbolic numbers matter more than you might think). The price stopped just short of that point and has gone downhill since, this makes me believe more firmly in a trend change.

Aside from there just being a HS formation, there is also MACD support of a negative break. The first shoulder and head are at the top of the MACD scale but for the last shoulder the MACD-lines have tumbled down in divergence to the market price. This indicates a technical weakness in the price action which is also an indication of future falling prices.

Also the price has broken through the 50-day moving average which is considered to be a pretty strong support, and the bollinger-bands have "opened-up" from a horizontal consolidation which indicates that a strong movement is coming.

This trade could have been entered on friday, but I was unable to access the market and didn't have the opportunity, also I am not always so keen on entering trades on friday afternoons. I entered this trade just minutes ago at the first asian action at a market price of 1.4432. I put the stop right above the neckline (around 1.4540). It is possible that the price comes back up to test the neckline which does happen a lot when a trend turnarounds appear. The stop is pretty big (100+ pips) and perhaps not really optimal, but when you enter a trade on the basis that a trend is changing, you need to look at things in a longer term, meaning that you use a bigger than usual stop-loss level and a longer holding period.

One must not forget to have a time or price goal for exiting the trade, and for the moment I am going to say that the price might move 450 pips from the neckline break (derived from the height of the formation) and that will be my preliminary goal.

There you have it, I will return with updates on this and hopefully other trades in the nearby future!

/H

Update: NZD/USD

2007-11-15T11:40:00.000-08:00

Hello readers,

This update took longer than I had first planned, but the market didn't move in a way that set up the trade so there wasn't much to report.

This is what happened since the last post:
The price didn't slide down to the trendlines, but instead went right up to somewhere around the middle of the cone-channel. Since then it has come down a little but there is still a long way to go.

I never ended up entering this trade since as I explained, the price hadn't come down as far as I wanted it to for it to be a proper bounce (obviously it didn't break through the trendline either). The price did move up for about 150 pips but I never felt like it was a proper bounce since it didn't hit either the trendline or the bottom BB and 200 SMA. But still it had crossed the 50 SMA and it was very close to the bottom trendline. Trendlines certainly isn't an exact science, so it might be ridiculous to pass on a trade when the price went down to just a few pixels above the line, but it still feels like the price could have come down further and made a "proper" bounce on all of the supports.

If you look at the chart, you can see that on the previous touch of the lower channel line, the price was close, then went up, only to come back down. The same thing might happen again, and that is why I wanted to wait for a "proper" bounce. However the price seems to be moving down slowly again and maybe it will end up "bouncing or breaking through" as was discussed in the previous post.

So all I can say for the moment is that I will wait and observe further price movement on this specific currency pair.

Do I regret not entering the trade upwards when I saw it keep on going up? Not really, you need to wait for the good ones, and the way its looking now the price seems to be coming back anyways, the result of a "bad" bounce.

I will keep you updated on this currency pair while looking out for other opportunities.

/H

NZD/USD channel-bottom and trendline approach

2007-11-12T08:39:00.001-08:00

Welcome readers!

Here comes the first actual TA of this blog. What we are going to be looking at is a channel and trendline break or bounce in the NZD/USD currency pair.

First some background info:
It might surprise people how big the NZD (New Zeeland Dollar) is in currency trading considering how small the country is, but the fact is that the NZD, because of its high central bank interest rate, is one of the most popular currencies to use for "carry trades". I will not discuss what a carry trade is here, but please read up on it as it is a very interesting trading method and it is good for any trader to understand how the carry traders continually force a currency pair like NZD/JPY up, and how the so called "credit crunch" of this years summer threw the exchange rates of this pair into a wild swing in part because of the scare it caused among such traders. Although these things are bordering on fundamental analysis, they must still be respected by anyone interested in fx trading.

However, NZD/USD is the pair we are looking at, and as I mentioned before we have the rate approaching a possible channel and trendline break or bounce situation.

Look at the chart and you will see 3 trendlines. The bottom one shows the currently prevailing support line, and the two middle ones show the cone shaped channel that we can see forming. As you can see, the price is approaching the lower lines and specifically the intersection of them. This is the point of interest for this trade. Note that I will assume that the price will keep on moving towards the the intersecting lines, if the price simply goes back up from now on there will be no trade opportunity.

When the price has approached the lines, the question is whether the price will bounce back up, break through the trendline, or simply go horizontal. I do not dare say if it will be one or the other, but what I can plan for is if I will buy if it bounces back up within the channel and if I will sell if it breaks through.

A thorough technical analysis will give indications as to why both scenarios are possible. To begin with it can be seen that there are many indicators lining up at the same place. For example the lower Bollinger-Band line, the 50 and 200 SMA (Simple Moving Average) are all located at about the same place as the intersection of the two trendlines. Since any of these indicators can contribute to a bounce, you can see why a bounce at this point is very likely. But this also shows how a clear break through all of these lines, would signal a strong technical break which implies further downward movement.

The MACD is, according to me, giving hints of a downward movement. As you can see by the MACD graph, the last two tops have a downwards trend, whereas the actual price has an upwards movement over the same tops. MACD is supposed to be an indication of the momentum of a price movement, and a so called "MACD divergance" which is what we are looking at now, indicates that there is a weakness in the upwards pointing price channel.

At the same time the Stochastics indicator can help us determine if the currency pair is overbought or oversold. Traditionally a cross from above the 80 to below indicates that the pair is overbought and is about to return to normal (ie. falling value) and vice versa for the 20 level. This applies to us because when (or if) the price has approached the trendline intersection, and the stochastics is at or below 20, and crosses back over, it is a indication that the price will return up from oversold levels, thus strengthening an upwards bounce.

That concludes the current technical situation. To summarize:

If the exchange rate breaks through the SMA´s, the bottom BB-line, and both trendlines. I will go short this pair. Since the trade has not quite been set up (price has not, and might never approach the two trendlines), It is hard to specify an exact price, but if the price crosses below the 200 SMA then pretty much all technical supports within reason have been broken. If we take the SMA value and give ourself a safe margin, that would put an entry price for going short around 0.7350.

If the price reaches the trendlines and these hold back the price (along with the other lines) and the price moves back up, I will go long this currency pair. Like I explained above it is hard to specify the entry specifics before the trade is completely set-up, however looking at the chart and all the lines, and giving the price some margin, I would estimate that an appropriate entry point is between 0.7500 and 0.7550.

Something that should never be underestimated is exit strategies. Honestly, anyone can find entry points through technical analysis, but it´s what to do after the entry that is the tricky part. Where should stops be? How do you take profits?

For a trendline break or bounce, the general rule for stop-losses is of course somewhere on the other side of the trendline. The other indicators (such as SMA´s) complicate this somewhat, but in general putting a stop on the farther side of the lines you are working with should work. I won´t specify anything until I have actually decided on an entry point however.

Exit points can also be simplified in this specific case. When it comes to the break of the bottom lines, a general TA rule of thumb is that the price will move the size of the channel the price is breaking through. This puts the take profit price somewhere around 400 pips away from the break, which is great. As for the bounce, the other side of the channel in which the bounce occurs is the logical take profit goal.

In general about stops and profit goals, always consider the profit/loss ratio. What is the ratio between the maximum loss (stop-loss) and the possible profit? Always try to get a ratio of at least 3/1. Successful technical traders actually have a surprisingly bad success percent on trades (50% isn´t uncommon), but this is made up for by going for trades where the likelihood of explosive price movements is bigger than on average if things go right, ie. a good profit/loss ratio.

Usually I like to look at the bigger and smaller time frames just to see if there are any surprises or bigger/smaller forces that can have an impact on my trade. I didn´t find anything of worth noting on those charts however, and I didn´t want to waste any more space on that. But try to do that yourselves.

Thats pretty much all I wanted to say about this set-up. Tomorrow I will update you on the price changes and what this implies for the trade. Hopefully the price will slide down to the trendlines shortly or within a few days and then I can set-up all the orders for the trades. If I am unlucky, the price just goes back up from right now and I miss out on a trading opportunity. These won´t be wasted however, since trade set-ups that are about to happen but become nothing is very common and only by learning to stick to your analysis only can you get the best trades.

Just incase there is a massive downwards price movement overnight I will set a entry for the short trade at 0.7347 with a stop-loss at 0.7453. That means I am risking 105 pips which is quite a lot, but at the same time the take profit level I will set is at 0.7023 (the width of the channel minus a little margin). Giving me a profit/loss ratio of 4.1 which is excellent. Of course you need to keep yourself updated on the price action and perhaps update the profit goal and move up (never down) the stop to give yourself a guaranteed profit if the trade moves far enough in your favor. By the way you might have noticed that I avoided using multiples of 10 on my orders (like not using 0.7350 or 0.7000) this is because research I have read shows that a majority of people put their orders on these numbers so I want to stay out of the irregularities of action that might occur on such values.

Sorry about the long post, talk to you soon!

/Henkos

Let´s get started!

2007-11-11T10:04:00.001-08:00

Here comes the first post in my forex technical analysis blog.

To begin with I should say that I have been dabbling in TA for two or three years as a hobby. I conduct TA on stocks as well as forex but it is only in the forex market that I engage in actual trades. My reasons for choosing the forex market is because it is very well suited for technical traders and there are many online brokers with low spreads and good trading systems.

For those who don´t know, forex is short for foreign exchange, meaning the trading of international currencies. Technical analysis (TA), is a way of analyzing a market by looking at charts and chart patterns instead of fundamental values. If this actually works or not can be debated endlessly, I will leave that subject alone. To read more about the basics of Technical Analysis, a good site is www.investopedia.com. This blog will probably be hard to read without at least basic knowledge in TA, but getting to that level is pretty easy just from reading online sources.

My reasons for starting this blog is mainly to improve my own analyzing and raise the level of my knowledge and reasoning of TA. When it comes to trading, the best advice is always your own advice, but sharing ideas and getting constructive comments is often a great way to raise awareness about different tools or other perspectives. I feel that if I write my analysis and reasoning for the public to see, it will force me to take more time and make more considerations and end up with a better analysis. Also if I expose my entries and exits I can´t lie to myself about trades and make excuses for bad trades. One of the biggest problems for traders in general is holding one self accountable for bad trades, and I can say that I am no exception. So basically, my reasons for having this blog is that I think it will improve my own trading.

I should add that I would love for there to be interaction with the rest of the TA community. A good debate following a posted analysis would be great, so I am hoping for comments from visitors, both experienced and learners, so feel free to ask questions too.

Finally, I should say that my personal style of trading has a trade duration of a few days to a week. I have experimented with both longer and shorter trades time wise, but I felt that I didn´t have enough time to keep up with shorter trades, and lacked the patience for longer trades. I often look for either channel breaks or bounces with oscillator indicators as support. In general I like to have at least a couple of tools agreeing with each other and really trying to wait for trades to appear and not force them to appear.

My next post will have a TA analysis with entry and exit strategies. Feel free to ask questions or comment in any way.

/Henkos

2007-10-19T10:06:00.000-07:00

Coming soon....