The strategy outlined in this article can be traded either as a short term trade set-up for a 20 pip immediate hit, or has the potential for development into a set-up which can give entrees into much longer moves of over 100 pips, although I have left it up to the individual trader how he or she might wish to play these longer moves, with some suggestions along the way.

This strategy is really a mixture of four different classical technical analysis techniques: Japanese Candlesticks, Moving Averages, Pivots and Momentum Divergence and Convergence analysis. It has been tested initially on an hourly time frame.

The candlestick element uses the hammer and shooting star candlestick patterns for determining possible reversal points. I didn’t choose these for any specific reason other than their familiarity. It would probably work with other reversal patterns too, so again there is scope for further research. For example I have noted some hanging man set-ups during back-testing and also quite a few 2-bar reversals.

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This article is the first in a series on how to develop a successful trading system and profit from the Forex markets. It is meant for traders of all levels of experience not just beginners.

The first step is to choose a trading strategy. The choice of strategy is critical for success but it is often overlooked. This is unfortunate because it is one of the most important factors in trading successfully.

There are many different strategies available to prospective traders, including mechanical strategies which monitor price action; technical strategies which use technical analysis and fundamental strategies which rely on economic news to generate trading opportunities.

Important things to consider when selecting a strategy are whether it is profitable, whether it suits the traders’ interests and whether it dovetails harmoniously with his or her lifestyle.

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The Cloud chart is a form of technical analysis developed in Japan which has spread in popularity so that it is now used in many countries outside of its native birthplace.

Cloud charts are also sometimes known as Ichimoku charts, and this article is predominantly an attempt to find out through rigorous back-testing how well this method is at generating reliable trading signals.

For those unfamiliar with Cloud charts the diagram below shows an example with all the major characteristics labelled with their names. The main elements are the cloud and the short and long moving averages which are called Tenkan Sen and Kijun Sen.

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The indicators TD Sequential and TD Countdown were developed by the market analyst Tom Demark as a way of measuring trend exhaustion and market turning points.

The indicators can be used individually or together. TD Sequential gives an inital signal following 9 strong trending price bars. This then initiates TD Countdown, which requires another 13 trending bars to complete. Once the final 13^th bar of the TD Countown is reached the signal for the end of the current trend occurrs.

It is not always the case that after the TD Sequential setup occurrs you will get a full TD Countdown 13 afterwards sometimes a signal from TD Sequential alone is enough to initiate a market turn. In this article I have only summarised how the indicators work and for more information there are several excellent books on the subject by Tom Demark himself and others.

GBP/USD

From a demark perspective the outlook for cable is overall quite bearish. The monthly chart isn’t so informative although the TD Sequential in June 2010 could be taken as a long-term bearish sign despite the countdown having been stalled for over a year and a half. (more…)

A review of the evidence, both technical and fundamental.

Technical Factors

The yen has fallen heavily in February, from trading in the 76.00s (vs the dollar) at the beginning of the month to rising above 81.00 – in just 24 days. It is often the case that extreme months can signal major changes in trend. My own research on sudden accelerations in rate-of-change led to the development of the Acute Monthly Reversal (AMR) indicator which has proven a reliable indicator of long-term trend change. This indicator signalled a change of trend for the EUR/JPY pair at the break of the 105.69 month of December highs as illustrated below: (more…)

Marabuzo means “shaven head” in Japanese and describes a candlestick which consists of a long body and very small ‘wicks’ at either end. A typical marabuzo is above average length and represents the predominance of one force – either buying or selling – over the other.

In theory the marabuzo is a continuation candle, meaning that a green marabuzo in an up-trend signals higher prices whilst a red marabuzo in a down-trend signals a continuation lower. This article, however, seeks to put to the test  the marabuzo’s fabled powers of indicating continuation using data for the EUR/USD currency pair.

In the diargram below I have highlighted the marabuzo bars in blue. There is no hard and fast definition, but for a candlestick to be termed ‘marabuzo’ it must embody the characteristics of long filled- in body and short wick. (more…)

The MACD indicator – pronounced “ MAC – dee“ or “M-A-C-D“ – is a popular and versatile tool, which generally appears as a histogram at the bottom of charts, with a line following it called the signal-line and a second horizontal line through the centre called the zero-line, above and below which the MACD oscillates.

Traders use the MACD to analyse momentum and measure the strength of the trend. They look for divergences and convergences between the MACD and price to indicate potential market turning points, and use the MACD crossing its signal-line for trade entry and exit signals.

The MACD is calculated  by subtracting a long exponential moving average of the price from a short exponential moving average. The signal-line is itself an exponential moving avergae of the MACD and the zero-line is the point at which the averages would cross if seperated. (more…)

One of the most popular indicators used by Forex traders is the RSI, or ‘relative strength indicator’. It is particularly favoured by intraday traders and scalpers. The indicator is a measure of price momentum – or to be more precise the relative strength of a security against itself.

How can something’s strength be measured against itself- that sounds illogical doesn’t it?
Well it can, sort of, by distinguishing between its up-days and down-days and comparing the one set against the other. The RSI does just that, by comparing the average of up-day closes versus the average of down-day closes over a certain time-span, using the following formula:

RSI = 100 – 100/1 +RS

Where RS = average of x day’s up closes/average of x day’s down closes.

RSI is an oscillator which always gives a result between 0 and a 100. The default time-span is 14
but other favourite spans I have seen in use include 6 and 7 – especially for shorter-term horizon traders.
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