Many analysts noticed long ago that not all the technical indicators work well on all the financial instruments.
However, any attempt to systematize the knowledge about the particularities of the technical analysis done upon different instruments sold on financial and trading markets has not taken place yet.
Though from time to time you can run across the phrases like «There are markets where it is easy enough to predict the movement like for ex. USD/DEM or USD/RUR».
Every experienced trader has favorite forecast financial instruments that they prefer to play on.
Victor Niderhoffer in his book «Universities of stockbroker» speaks about Japanese yen.
However, we are going to speak about 4 main currency pairs here: USD/JPY
It is to notice that a currency pair USD/JPY has a very low volatility that’s why any fluctuation within the day seldom exceeds 200 points.
Let’s consider first daily yen charts and then analyze the indicators action in other charts in decreasing order of their time window.
Daily charts. The only indicator that gives the correct signals on daily yen charts is MACD.
A good result is also provided by the ADX and DeMarker-oscillator developed by Thomas Demark that indicates the direction of the main trend. This indicator is used in most computer programs of technical analysis.
The rest of the indicators especially oscillators such as stochastics, index of trading channel etc are almost useless.
If you pay attention to the daily yen charts you’ll see that currency pair USD/JPY seldom has a lateral trend.
The problem consists of the fact that daily yen charts can identify the trend only post factum.
Japanese candles in the candlestick chart don’t give much information since they are posted in a chaotic order.
That’s why it is better to use linear charts that better show the figures of classical technical analysis – mostly channels, pennants and double peaks.
4-hour charts. They represent the best way to forecast with the help of classical technical analysis.
If the trend is represented by a strongly broken line in a daily yen chart then the same scheme in a 4-hour linear chart represented shows motion in a particular succession.
Good results can be obtained by forecasting with the help of Japanese candlestick chart. The stop-loss there is set upon the extremum of the previous candle opposite to the present position.
In other words at long position opening the stop is placed several points higher the verge of the lowest shadow of the previous candle and at short position opening it is placed several points higher the verge of the previous candle top shadow.
Good results can be obtained with the help of trading systems developed at the intersection of slipping medium ones.
These systems work the best in trend markets that’s why they are ideal to be applied to yen.
Stochastics both slow and fast does not work well enough however, Larry Williams oscillator %R works more precisely.
We are speaking about the indicator used in the program MetaQuotes.
The %R calculation formula is the following:
Wm%R = 100 х H- C/H-L where,
H = the highest maximum price for the chosen period (10 days)
L = the lowest minimum price for the chosen period (10 days)
C = the final shutting price.
The most precise results are received by the index of the trading channel CCI at trading along the dominant trend.
The trend that is seen in more large-scale charts namely in daily ones stands for a dominant one.
The signal to open the position is sent at crossing zero line by index line and the signal to close the position is sent at crossing lines 100 or - 100.
The period is standard there and is equal to14.
The Fibonacci level works badly as I can say from my own experience. Most analysts consider them the last or don’t take them into consideration at all.
Hour charts. Here is the place where slow stochastics can be widely adopted.
The positions get opened at crossing of stochastic lines (periods 5 and 8, exponential moving averages, slowing down from 3 to 6) and the stop-cross can be set within the limit of 20 points.
CCI sends signals too late that’s why the biggest part of the trend that you can get some profit from gets lost.
The same thing could be said about the RSI index (Relative strength index), the period is usually set as 14.
You can select main turning figures in the Japanese charts that consist of one of two candles.
It is useless to look for multiple-candle combinations in these charts as the trends usually take 3-4 candles that’s why the whole idea of candle combination vanishes.
30 and 15-minute charts. A rather good result in this scale charts can be obtained by stochastics though it would be better to use Japanese candlestick charts taking into consideration dominant trends on longer scales.
The extension of the trend covers as usual up to 10 candles that allows to use their combinations.
The most often used turning figures are morning and evening stars. The stop-loss there can be fixed as minimum: 15 points.
Since the pair USD/JPY has a lower volatility than other ones, trading upon 15-minute charts is not always expedient.
GBP/USD Daily charts. Japanese candlestick charts represent as well longer shadows than the chart of other financial instruments.
In daily periods you can see well gaps on GBP, though some part of them can be easily predicted.
However, gaps are frequently unpredictable. There one can use the Bollinger bands set with period 20 and deviation 2 (actually these are standard settings).
Trading there is carried out upon a traditional scenario – the entrance into market is effectuated when the price crosses one of the lines and the point of profit taking is desirable to be approximately at the level of the opposite line.
Slow stochastics works almost with no retarding.
Classical technical analysis is not great help as well as Japanese candlestick charts.
No movement is usually fixed in the channel but if a short trend appears, the pullback will be insignificant.
That’s why the best way to get profits is a floating stop-loss.
Gaps are also frequent as well as in daily charts but in 4-hour charts they are usually directed along the trend.
This decreases the threaten of additional losses.
Charts of 1 hour and less scale. Since English pound has a record of unpredictable financial instrument from the point of longevity.
To make an analysis of short-term charts is preferable than long-term ones.
It is better to stake on the volatility and breach determined upon the Chaikin Volatility indicators (Chaikin volatility oscillator), Average True Range, Standard Deviation.
The Bollinger bands can be chosen as indicators indicating the trend direction.
The Bollinger bands are used the following way: the trend is determined along the stripes direction and the pullback identification is determined if the price reaches the medium line and pushes off it.
If the price crosses the medium line and goes to the opposite side of the line, a trend change is possible.
It is definitely determined upon the changes in the stripes direction.
EUR/USD Daily charts.
Trend lines are clearly seen in daily euro charts.
On the whole European currencies are more predictable regarding long-term periods comparing to pound and yen.
Some dealing centers run statistics upon the number of open long-term currency positions.
Euro and Swiss frank steadily keep their leading positions.
Use of oscillator is pointless due to trend market.
Within day charts. The best instrument there in this currency pair within the whole day is the trading system Oscillator + CCI.
The positions in this system open when the oscillator crosses zero line (for 4-hour and 1- hour charts).
The position gets closed when the oscillator crosses back point 100 (long positions) or point -100 (short positions).
The main price motion model within the whole day: a sharp price run-up takes place at 9-10 am Moscow time, a lateral trend changes by a directed one which as a rule continues till the American session starts.
Although, before the beginning of the main trend a leap to the opposite side takes place that’s why it is very important to be careful with such market motions.
During the American session a trend change is possible.
This particularity of the market can be perfectly used.
If you cannot guess by hour charts in which favor the exit from lateral trend will take place, you will have to stay and wait for the price run-up.
A leap can be caught when the candle crosses a definite level.
It is determined by the value of Average True Range indicator.
Two GTC stop-orders (valid till cancellation) are placed above and under the price of day opening at the number of points that is equal to the indicator value taken with period 14.
After you have to wait for the breach and work with a floating cross-loss order as far as the profit grows.
USD/CHF
Daily charts. There is an opinion that the chart of Swiss frank is a mirror reflection of euro.
In respect of daily charts it is true.
Concerning the within day scale the situation is much more difficult.
Among the particularities of this instrument we shall mention high volatility.
That’s why on one hand at trading upon daily charts there is a risk to lose much however on the other hand there is a chance to gain a lot at fluctuations within the day.
Almost faultless signals in daily charts are given by the system built at the intersection of floating averages.
If we have a look at the linear chart we will perfectly see the figures of classical technical analysis.
4-hour charts. They show the figures of classical technical analysis much better than daily charts moreover using candles we can see well turning figures: «hammer», «hangman» etc.
We can use only the candles «Doji» as a separate figure.
Good results can be obtained from the trade upon the Fibonacci levels.
In general the systems based on breaching of any levels determined upon the Fibonacci numbers or upon the channel verges or simply upon psychological basis, work rather precisely on Swiss Frank due to its volatility.
As well you can trade in this time period with the help of the Parabolic system along the trend dominating in the daily charts.
The system period shall be set as 0.02.
1-Hour, half an hour and 15-minute charts.
Here you shall pay attention to the combinations of Japanese candlestick charts and volatility.
The use of classical technical analysis does not work here and the use of the Parabolic system as a trend tracking system may even be dangerous!
But the parabolic system can still be very useful in some other field – you can use it to determine the levels that once being breached may cause a considerable price leap later.
Very often you can notice horizontal lines especially in the 15-minute charts of Swiss frank that are build by Parabolic.
An attentive trader will notice that the price reflects from those lines periodically and with time the volatility increases.
The trade at the breach of these lines can bring profit because the price after the breach usually goes for 40-50 points.
Here is the strategy of breaking into the market: the entrance is effectuated only with the help of stop-order, that is valid till the cancellation.
And the point of entrance shall be 5-10 points above (for long position) or under (with short position) the Parabolic line and the stop-loss shall be within the limits of 20 points as if the breach turns to be false (usually it happens because the spread enlarges at increasing volatility and broking quotations differ from the price level in the chart) then a strong reverse motion starts that may bring negative results.
The profit withdrawal is done with the help of a floating stop-loss.
The methods of the stop-loss setting may be different from setting by the indicator Average True Range value to more complicated combinations related to the use of Japanese candlestick charts.
Many traders working on the Forex market rely more on their own experience than on the knowledge.
That’s why the things that seem to be absurd at first glance are more estimated by the trader than the ones more explainable from the logical point of view.
Nobody can say why stochastics works better on yen than on pound.
But on the other hand nobody has ever been able to explain why the Fibonacci sequence is so frequent and any mathematician does not deny the meaning of this phenomenon.
One cannot deny that many other great discoveries have been done experimentally.
Perhaps, in 200-300 years the market rules that have been instinctively created by traders will become an axiom.
However, you shall not deny exact sciences for the sake of intuition or else the trading on the financial markets risks turning into a simple casino roulette gambling.
