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The Stochastic Range Trader: New Trading Strategy to Scalp Yen pairs
This is a new strategy that uses a regular 14 bars Stochastic Oscillator (3, 3, 1) to trade yen crosses. Please, let me know if you have any question or recommendation to make it better.
RULES for the FX Stochastic Range Trader Strategy (BETA VERSION)
Enter Long When the %K lines crosses above the %D line and the lines are below 20
We only trade in the direction of the currency with the highest interest rate.
Sell Stop: We should close our trades at 3 times the value of the average true range.
Profit Target: Take profits at entry price plus 3 times the average true range
We chose to use the same value both for risk and reward to avoid any statistical bias in any direction. For example, if our stop id much closer than our target, odds are that we are going to have more losing trades than winning trades
FX Stochastic Range Trader suggestion
Additional/replacement rule: don't close the longs, counter-trade the indicated short reversals i.e. hedge until the next 'go long' signal. Use realized counter-trade profits to add a further long position.
Reasons: a need to better employ capital, increase returns while staying safely in the market. This is more swing than range trading I accept (see comment below), but it does not affect existing system profit if your counter-trades get knocked out. Likewise, you are adding to your long positions with the higher trend and never going 'naked' short on the higher interest rate currency - that is expensive.
As a general comment, this is not presently a range trading pair, if that is the sole intention of the indicator. The T1 trade was closed too early under the indicator rules - a new cycle or upswing in this pair lasts a minimum 3-4 calendar days and the indicator caused a close-out on day 2, so a lot of pips were 'left on the table' - and the trader was left idle for the next nine days during the remaining day of the upswing and all the downswing!
Finally, with an equal risk:reward ratio, your trader is not going to be profitable in the medium to long term unless they make at least 6:4 win-to-loss ratio. In my thinking, a risk:reward ratio should be at least 2:1, minimum.[correction Jun-26, 1:2 intended!]
Last edited by terton; 06-25-2007 at 09:32 PM.
FX Stochastic Range Trader suggestion
Originally Posted by terton
Thanks for you suggestion terton.
I agree with most of your ideas but I would like to backtest them before I give you more details.
I dont necessary agree that a risk: reward ratio should be at least 2:1, minimum. Your profit expectancy depends not only in your risk reward but also in your percentage of winners. I personally trade with RR close to 1 because Im counting with a bigger percentage of winners. If you have a 2:1 RR you should expect to lose money two times more often than you win and this could affect your psychological bias towards any trade.
The best risk reward is the one that fits your personality and your risk taking profile.
Let me know what you think guys
Retail Traders are buying the yen ahead of next Thursday FOMC meeting
According to the SSI, the ratio of long to short positions in the USDJPY stands at -1.45 as nearly 59% of traders are short. Yesterday, the ratio was at -1.37 as 58% of open positions were short. In detail, long positions are 4.7% lower than yesterday and 8.0% stronger since last week. Short positions are 0.7% higher than yesterday and 7.9% weaker since last week. Open interest is 1.6% weaker than yesterday and 2.5% above its monthly average. The SSI is a contrarian indicator and signals more USDJPY gains.
Correction: risk:reward should have read 1:2, not the reverse. Sorry for the confusion.
On the basis of averaging 50:50 win to lose, which is the same probability as tossing a coin, a trader needs larger wins than losses to be profitable. So if she or he risks 20 pips in stop-loss margin with spread, then they target at least a 40 to 50 pip gain. If the average for a competent trader is 6:4 wins to losses, then they will be very successful in the medium term, providing the risk:reward is achieved.
I also recommend not increasing exposure (the risk sum) on trades until 2 consecutive losses and one win have occurred, to show you are matching probability and are still on track with your performance i.e. by probability are not going to take a loss on the very next higher sum trade.
Last edited by terton; 06-25-2007 at 09:45 PM.
JPY stillhas the potential to go higher IMO.
I can see that when it turns there could be a move down to
around 122+/-, but a good reversal signal is required before getting short.
There are a number of active Gann resistance calcs - highest being
125.60 falling down to 124.90.Harmonic reversal target and PRZ.
GT - arco
Agree. This week's hot inflation data, the departure of Watanabe should all provide some fundamental support for yen strength this week.
Originally Posted by arco
USDJPY presently wants to go to 122.17. Doing so in a rather uncontrolled fashion. Could base around there a few days and start a climb back for a new cycle commencing early July 4. Alternatively, if the 76.4 ret gives way before then at about 121.70 then a larger correction is taking place. But I think not.
Couldn't have said it better myself.
Originally Posted by terton
I'm in the same boat as both of you. A deeper carry trade unwinding would likely accompany (or more likely follow) a number of bigger changes in global financial markets. We would probably see a big pull back in equity markets in both the industrialized and emerging markets. Corporate spreads would rebound from their cyclical lows. And, most likely the trigger for everything, a massive repricing in CDOs would hammer basic lending and work its way up into the investment community. Consequently, I'm still found of buying on pull backs.
You can see in the chart that I attached that USDJPY is still in a rising trend channel. While top pickers may be tempted to say this is a turn because of the accelerating nature of the three falling candles, I would oppose this viewpoint. Aside from that channel, we have a number of fibs congregating in the 122.00-50 area. At the same time, the previous swing high back in late January/early February could offer new support. And, refuting the historical significance of USDJPY's recent high, the pair is at a mere 4 and a half year high (not a multidecade or record high like NZDUSD and EURJPY).
My only concern with the Japanese yen, is the technicals in its crosses don't look nearly as promising as USDJPY. Nonetheless, I'm looking for the pair to retest 122.20 or lower to establish a long position. I may have already missed my oppurtunity though.
Yen Gains Across the Board on Carry Profit Taking
The yen is gaining against all of the most liquid currency pairs.
Do you think this strength will continue?
It's currently around 122,50, do you expect it to go down or climb up?
I think we could see USDJPY test 122.00 again before making its way higher once again towards 123.50/124.00. Major event risk in the next 24 hours with US GDP, FOMC tomorrow following by Japanese CPI tomorrow night.
If it goes down 122 i will definetely take a long position.
USDJPY follows Wall Street
I know the feeling very well. However, the upmove can consolidate through the rest of this mini cycle, making a potential inverse h&s pattern after its typical four intraday waves correction. The time for an upmove would be after 8:00 GMT next Weds Jul-4. I see all the joy of a 6-day triangle, between 123.37 and 122.67. The pair stopped a bit short in my view, so it is truly following Wall Street, with maybe the big funds all using the same program!! Alternative to 96 hours of range trading: just drawing breath before the next dive.
Originally Posted by John Kicklighter
Last edited by terton; 06-27-2007 at 11:48 PM.