Retail Currency Trading – Retail Forex

Ichimoku is a fancy Japanese name for a complex technical indicator. Its main components are still moving averages. Ichimoku looks intimidating but ones we understand its components and the significance of the meaning of their interaction every trader can find it very useful. Let us look at Ichimoku components. Out of respect for its creator Goichi Hosoda, a journalist, we keep naming Ichimoku components by their Japanese names:

• Tenkan-sen shows the average price value during the shorter time interval defined as the sum of maximum and minimum within this time, divided by two (usually from 6 – 10);

• Kijun-sen shows the average price value during the longer time interval defined as the sum of maximum and minimum within this time, divided by two (usually from 18 – 25);

• Senkou Span A shows the middle of the distance between two previous lines shifted forwards by the value of the second time interval;

• Senkou Span B shows the average price value during the longest time interval shifted forwards by the value of the longer (Kijun-sen) time interval (somewhere between 45 and 60 periods).

• Chinkou Span shows the closing price of the current candle shifted backwards by the value of the longer (Kijun-sen) time interval.

1) First part of Ichimoku is a change in trend. Tenkan-sen and Kijun-sen serve as simple moving average crossover. When Tenkan-sen crosses Kijun-sen top-down we get sell indication and we get buy indication when Tenkan-sen crosses Kijun-sen bottom-up.

2) Second part of Ichimoku is support and resistance indication combined with volatility measure. Senkou Span A and Senkou Span B form a “Cloud” or Kumo. Besides shoving the support and resistance levels only, comparing to pivot points, the Kumo is also an indicator of volatility.

3) The third part of Ichimoku shows market sentiment. Chinkou Span is a measure of market sentiment. When sellers dominate the market, the Chinkou span will run below the price trend. When a pair remains bid in the market or is bought up, the span will rise above the price action.

The picture above shows Ichimoku (7, 22, 52), with Tenkan-sen in red, Kijun-sen in blue, and Chinkou Span in pearl white. Senkou Span A (Up Kumo) is brown and Senkou Span B (Down Kumo) silver.

How to trade using Ichimoku:

Look at the Kijun-sen / Tenkan-sen Cross - The potential crossover in both lines will act similar to moving average crossover. When short term trend crosses longer term trend it is a significant point in price action and always indicates a change.

Confirm the down or uptrend with Chinkou Span – If the market sentiment is in line with the crossover the probability of the trade going in the right direction will increase.

Price action needs to run out of the Kumo (Cloud) - Anticipated down or uptrend needs to make a clear breakthrough of the cloud of resistance or support because when price hovers inside the Kumo it is caught in a channel. Then the cloud margins form the support and resistance levels.

If the price is above the cloud, its upper margin forms the first support level, and the bottom margin forms the second support level.

If the price is below cloud, the lower margin forms the first resistance level, and the upper one forms the second resistance level.

If the Chinkou Span line traverses the price chart in the bottom-up direction it is signal to buy. If the Chinkou Span line traverses the price chart in the top-down direction it is signal to sell.

If the price is higher than Kijun-sen, the prices will probably continue to increase.

Tenkan-sen is also used as an indicator of the market trend. If this line increases or decreases, the trend exists. When it goes horizontally, it means that the market has come into the channel.

MACD is yet another variation on moving averages. MACD is composed of three averages, usualy of exponential moving averages: Fast EMA, Slow EMA and Signal. EMA’s can be (but of course) applied to open, close, high, low or median. It makes a bit of difference. You have to test before going to trade live. MACD is a bastard, because it is an indicator as well as oscilator. Usualy instruments of technical analysis are either indicators or oscilators. Indicators can have any value while oscilators move from one side of imaginary line to another, staying relatively close to median value. From the pattern that MACD makes, traders try to anticipate the direction of the trend. MACD looks (depending on your settings of colours and lines) something like this:

Moving Average Convergence Divergence

Longer term trend (slow ema) is represented by »zero line« and fast ema by magenta coloured line. The length of silver stripes represent the divergence of fast ema from slow ema. Important points are crosses of zero line (cross between slow and fast ema) and some paterns. One pattern I would like to expose here is an arc. An arc forms either at far distance from the zero line or immediatelly after it. An arc represents a top of a former trend and as such the bottom of the new trend. If we have five or more silver lines supporting an arc this usualy means that the trend changed direction and we should follow. At the point of arc meeting starting leg five or seven columns away we open a position in the direction of the trend. In the picture below we circled an arc that gives as buy signal on its way up, crossing zero line from below.

Arc is a perfect sign of trend changing.

There is a separate tread in Forex Factory describing 4 hour MACD trading with all the patterns involved. If you want to learn more, Forex Factory is the place to go.

MACD trading works best with 4 hour or daily charts, because shorter timeframes tend to be to noisy. MACD signals are fairly good opening signals, while they tend to be to late for closing. When trading according to MACD it is advisible to use stop loss and trailing stop functions. Trailing stops should reflect double ATR for the time frame, or they will tend to prematurely close.

WSJ – Washington Is Quietly Repudiating Its Debts (August 22, 2008; Page A15) was an article that made me sit down and write my personal view of US “debt problem”.

Consecutive USA governments are not by themselves guilty of accumulating more than 9.5 trillion of outstanding treasuries. Japan, Asian Tigers, and later China helped with its build-up. If we take, for example, a case of Japan we quickly find why Japan is the biggest buyer of US denominated assets:

Japan is net exporter. If they want to purchase raw materials and energy for their production, they need to import those using US dollars. When they sell them abroad, they get dollars, many times the value of raw materials and energy. Their homeland suppliers and workers they need to pay in yen. Therefore, they have to sell US dollars to buy yen. If they sell a lot of dollars the price of yen in dollars tends to go up.

If the price of yen in dollars goes up, the price of Japanese exported goods in US dollar terms tend to increase. If they become too expensive, nobody buys. If nobody buys we have a recession.

To keep the dollar price of yen (USD/JPY exchange rate) low, Japanese have to sell yen for dollars and store dollars in their vaults or to lend them. Natural borrower of US dollars is US government. Everybody likes to lend to solvent borrowers. When US government borrows, the US immediate buying power is higher than it should be exactly for the amount borrowed. USA was the engine of growth for the whole Asia for more than 20 years.

USA dutifully paid all of its debts at maturity. National debt in 2008 represents more than 60% of yearly GDP. Is USA financial system in danger?

In my opinion, already the administration of Bill Clinton (the guy that has leaded the nation between Bushes) prepared emergency exit strategy. “In January, the U.S. Treasury finally auctioned the first in a new series of inflation-indexed securities. With their penchant giving new products cute names, Wall Street professionals have started calling these notes TIPS, an acronym for Treasury Inflation-Protected Securities.” Wrote William F. Ford in ABA Banking Journal, Vol. 89, 1997. Today, on August 22^nd 2008 the yield difference on 30 year treasuries is 4.47% for regular bonds against 2.04% for TIPS (Source: Bloomberg).

TIPS are composed of two parts: inflation-connected interest rate and real interest rate. While with regular treasuries yields are fixed regardless of inflation rate, TIPS pay out inflation adjusted amount. The higher the inflation the bigger the payout on coupons at maturity. From cash flow perspective regular bonds are worth less when inflation is high. TIPS do not lose value if inflation rises. I choose TIPS against regular bonds 5 out of 5 times.

In early eighties we have already seen rampant inflation of over 15% in the USA. We can see it coming again. When (I did not say if) inflation picks up, the Fed lets it go until it rises above 10%. All markets rise, except commodities and bonds. Oil prices fall to 50$ a barrel (this is still 500% more than 10 years ago, when it fell to 10$ in December of 1998! – Source: WTRG Economics), and 30 year treasuries’ prices (at 3% coupon to yield 15%) drop to 20% of their nominal value. Source: Bond Yield Calculator.

What does a smart government do? A smart government in a series of auctions issues heavily demanded TIPS for about two trillion US dollars and slowly and quietly buys back regular bonds for 20 cents on a dollar, thus replacing 9.5 trillion in bonds with 2 trillion in outstanding TIPS. And who cares about the guy making a buck out of 50 cents!

Technically, US government would not repudiate the debt, although the effect seems much the same. Some creditors most likely would not be happy. One of the consequences might be a change in structure of foreign reserves. While now about 63% of 6 trillion of global foreign exchange reserves are held in US dollars, 27% in euro and 10% in all other currencies together, after an operation of “Debt wiper” euro would gain to the expense of US dollar. US dollar would fall against all majors (from 75 where it is now to 50 or even below).

Asian economies would have to write of substantial amount of reserves, but the development that they have achieved in the last quarter of a century probably outweighs the costs incurred. We would probably exit the stagflation times stronger than ever, ready to make another inflationary bubble, hopefully something not already seen.

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