Feb.28, 2011
This basic tutorial on money management talks about the trading risks, using the stop-loss levels and diversifying to several different currency pairs. The video will be useful to newbies who often underestimate the importance of a proper position sizing and money management in Forex trading.
This video presents a technical analysis of GBP/JPY and EUR/AUD before the European Forex trading session today. It uses several charting tools to come up with the trading insights.
Posted on Forex Video Zone.
EURUSD Forecast
The EURUSD bullish momentum was paused on Friday after unable to make a break above 1.3860 key resistance area. The bias is neutral in nearest term. Although overall we are still in a bullish phase since bounced from 1.3528 last week, we need a clear break above 1.3785 to continue the upside pressure retesting 1.3860. Immediate support at 1.3700 ? 1.3690. A clear break below that area would change the intraday bias to bearish testing 1.3650 ? 1.3600. On the upside, a clear break above 1.3860 would change the weekly bias to bullish, testing 1.4000 ? 1.4250 region.
EURJPY Forecast
The EURJPY continued its bearish pressure on Friday on a broad Yen strength, slipped below 112.08 earlier today in Asian session but still unable to make a clear break below 112.08 so far. Overall we are still in a range market between 110.80 ? 114.00 and there are no changes in my daily outlook and I still prefer a bullish scenario. Aggressive traders can still long around 112.08 with stop loss below 110.80 while conservative traders can long around 110.80 with smaller stop loss.
GBPJPY? Forecast
The GBPJPY continued its bearish bias on Friday, bottomed at 131.11 but bounced higher around 131.70 at the time I wrote this comment. The bias is neutral in nearest term but overall we are still in a bearish phase after a failure to make a break above 135.50 and violated the trend line support as you can see on my h4 chart below. A clear break below 131.11 would continue the bearish pressure targeting 130.50 and 129.50. Immediate resistance at 132.50. A clear break above that area would change the intraday bias to bullish testing 133.25 region.
AUDUSD Forecast
The AUDUSD continued its bullish bias on Friday and slipped above the trend line? resistance (white) as you can see on my h4 chart below suggests potential further bullish pressure targeting 1.0256 all time high, even new all time highs in near future. Immediate support at 1.0150. A clear break below that area would lead us to neutral zone in nearest term testing 1.0120 ? 1.0070 support area but overall we are still in strong technical bullish bias and short position is not recommended. However, note that the rising wedge bearish scenario remains intact and things could be a little bit tricky as we are now in a critical phase.
GBPUSD? Forecast
The GBPUSD was volatile but indecisive on Friday. The bias is neutral in nearest term and overall price still trapped in range area of 1.6300 ? 1.5950. Immediate resistance at 1.6180. A clear break above that area would change the intraday bias to bullish and open the door for further upside pressure retesting 1.6272 ? 1.6300 key resistance area. On the downside, a clear break below 1.6030 (Friday?s low)) would continue the bearish pressure retesting 1.5950.? Key support ? resistance: 1.5950 ? 1.6300.
USDJPY Forecast
The USDJPY still able to maintain its bearish bias on Friday and now testing Thursday?s low at 81.61. A clear break below that area would continue the ?head and shoulders? bearish scenario targeting 81.30 ? 80.90. Immediate resistance at 82.05. A clear break above that area would lead us to neutral zone in nearest term testing 82.50 but I think the overall bias should remain to the downside and I still prefer a bearish scenario at this phase.
USDCHF Forecast
The USDCHF bearish momentum was paused on Friday. That was a normal consolidation after a strong bearish momentum in the last two weeks and although the bias is neutral in nearest term, overall the technical bias remains strongly bearish especially if price able to make another clear break below 0.9233? targeting 0.9100 and 0.9000 this week. However, as you can see on my daily chart below, we have a double bottom formation at 0.9233 area which suggests potential upside correction testing 0.9330, but long position is not recommended. A clear break below the double bottom would reactivate my bearish mode.
?The market does not reward iconoclasts.? ? Joseph Trevisani
Hello:
Technical analysis is essentially the study of human behavior. Many price actions can be used to the trader?s advantage provided that he understands how each price action functions. Correlation as a price action is of enormous importance. Markets are generally uncorrelated during consolidation periods and correlated while trending. We generally operate under the assumption that losses generated when the trend weakens will be recovered when the trend resumes.
The Pedigree of the Strategy
There had to be better ways of curtailing risk and correlation strategies are proving to be one of the answers. Correlation is good profit in itself, as well as being an effective check on risk. For those who weren?t aware of it, the EURUSD tends to be negatively correlated with the USDCHF, whereas it often gets positively correlated with the GBPUSD. Furthermore the AUDUSD and the NZDUSD generally get positively correlated; and so are the EURAUD and the EURNZD. Likewise, the EURJPY and the GBPJPY are positively correlated. There are other examples that time wouldn?t permit me to mention.
This article would focus on the EURUSD-USDCHF correlation. It?s very rare to see both the EURUSD and the USDCHF going up, but it isn?t rare to see both of them coming down. What would happen if the EUR is weaker than the USD while the USD itself is weaker than the CHF? Both the EURUSD and USDCHF would be caught in bearish moves (as evident in December 2010). With this strategy, I consider it sensible to call short trades only since it?s assumed that a pair that rises would eventually fall. Short positions are opened each on the EURUSD and USDCHF. A loss from one pair is recovered by a profit from the other pair. Plus profit would be maximized if both pairs are falling. It?s easier for spot Forex prices to drop than to rise, and there?s no such thing as a permabull market.
Entries and Exits
This is an NFA-compliant cum non-directional strategy: it?s a purely discretionary system ? incorporating rule-based entry and smoothing techniques. In order to know when to enter and when to exit, the RSI (Relative Strength Index) 14-period is used. There?s a need to avoid too many or too scanty signals, and that?s why a 4-hour chart is used. The chart we watch is the EURUSD chart. We enter 2 ?sell? orders on the 2 pairs when the RSI is in the overbought region and exit when it gets to the oversold region (with the understanding that there would be a positive difference between the result of the EURUSD trade and the result USDCHF trade). We don?t enter the market again until the RSI reverts back to the overbought region. Please, bear it in mind that it may sometimes take a long time for the RSI to move from the overbought region to the oversold region and vice versa.
Trade Management
As said earlier, loss from one position is compensated for by profit from the other position. Moreover, profit is usually optimized in that the EURUSD moves faster than the USDCHF. A position size of 0.01 lots per trade is used for each $1000 (thus making it 0.1 lots for each $10000). The Stop Loss is 500 pips from the entry price and no take profit is set ? for profits are always taken when the RSI is traded thru. The wider the Stop, the larger the annual returns, but the tighter the Stop, the smaller the annual returns (whereas tighter Stop reduces the exposure of a portfolio). The tighter the Stop, the higher the number of trades, and vice versa. The tighter the Stop, the lesser the trading accuracy while a wider Stop brings more accuracy (but lesser accuracy can also bring good results). Coupled with small position sizing, a tighter Stop brings higher drawdown whereas a wider Stop brings smaller drawdown.
A Trade Example
The accompanying chart depicts the EURUSD when it was falling and how I took an advantage of it. Between December 31, 2010 and January 10, 2011, the EURUSD fell by over 450 pips. You?d get more insight into this correlation methodology by trying to check the 4-hour chart movement on the USDCHF during and after this period. The vertical red line on the left shows where a short trade was entered and a similar line at the right shows where it was exited. The strategy you need to make money should be simple, but powerful.
Conclusion: It?s very much important that enough patience is exercise as regards the entry and exit criteria of this strategy. The article above is a free gift for all my readers (it shouldn?t be used for any commercial purposes), and therefore any questions and opinions about it are welcome. Finally, it doesn?t entail any solicitation to assume a market decision.
NB: An article about effective gap trading in Forex is coming soon (but only my clients would have access to the account on which it?s being traded).
I?ll end this article with a quote from Christian Lukas:
?The enormous effort that goes into collecting information can be considerable reduced by using a systematic approach ? If a trader achieves profits after careful analyses, then these are based on his own skill, which creates confidence. And if he makes loses despite spending a great deal of time conducting an analysis, he knows at least that those losses are just part of the system.?
Your questions and opinions are highly welcome.
Thank you.
With best regards,
Azeez Mustapha
Forex Signals Strategist, Funds Manager &Coach
Email: amustapha@fxinstructor.com
Yahoo! Messenger ID: saazalmu
Get my Forex trading signals at: http://www.fxinstructor.com/en/analytics/ituglobal
And my past articles are also available at: www.ituglobalforex.blogspot.com
NB: There is risk of loss in trading, but it is possible to be a successful trader.
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