July Behind, August Ahead

At risk of jeopardizing positive momentum, I’ll say it anyway: July was a great month.  The final two weeks brought the incline of my primary account’s equity curve back to a more reasonable angle, but were still fantastic weeks.  Overall, the preceding 6 weeks have been an amazing streak that have more than doubled my equity from mid-June.

Perpetuating success means looking around for failure.  Bad habits go away, making room for others or become dormant only to return more forcefully than ever.  I’ve elaborated some on what I feel I’ve been doing right in previous posts; but what have I been doing wrong?  Well, the usual answer: ineffectively managing risk.  My win ratio has been through the roof across this 1.5 month period (well, what I regard as “through the roof”: 70-80%), but those times where I have been wrong, especially one instance of multiple pairs on together with a correlated risk profile that I didn’t properly account for, I’ve taken hits that I think are unacceptable.  A related issue is volume: “high probability setups” is just fine, but when you’re taking quite a few of those and managing them a little more shoddily than you’d like because quantity overwhelms your patience, availability, etc., then there is a problem, “high probability” be damned.

This month, I’ll be concentrating on 1) moderating trade volume.  No quotas or that kind of nonsense.  2) In tandem with that, evaluating trades-in-progress (TIP) a bit more rigorously.  I usually time stop any TIPs two times a day (once around 7-8 a.m., the other around 12 p.m-1 p.m. ET) whether in profit or not, but there is always the occasional trade I regret letting go of because of further potential.  Sure, I’ll dip back in later if variables align, but fewer trades and less analysis for re-entry would follow from letting those “winners run”.  Or maybe I shouldn’t screw with a good thing.  We’ll see.

In other news, a randomly answered question over the weekend about fibonacci retracements and extensions rekindled my interest in their application to my own activity.  I’ve never been much for mucking around with indicators, methodologies developed and peddled by others, systems (automated or not).  My toolbox has accumulated odds-and-ends over time, but is relatively lo-tech, simplistic and without novelty.  Thankfully, innate temperament has always dissuaded me from hopping on the custom indicator/EA/method-o’-the-week hamster wheel.  Fibonacci – and Ichimoku – is, really, about as “sophisticated” as gets, and I realize I’ve missed how my use of fib studies complemented those tools I more typically use.  My plan is to use retracements, projections, extensions and fans more extensively, and if I’m inclined I’ll get back into some Gartley and other harmonic patterns.

Double Top It Is

While it doesn’t negate the neutral-leaning movement on IKH at this point, last night’s reference to a potential double top scenario did come about, though the extension below the trough between tops at 132.50 has been shallow to this point. I took several trades including a short from 135.70, but remained flat overnight….

GBP/JPY: Double Top

Contemplating a buy limit somewhere below the current price….

Confluence

Of those skills inherent to consistently successful discretionary traders, few can more basic or important than the capacity for recognition and practical application of confluence.  There are many types of confluence in trading: candlesticks and pivot points or fibonacci retracement/extension levels, indicators x and y, median line/pitchfork analysis and chart patterns, and so on.  As we’ve seen, particularly in the case of candlesticks, Eastern and Western methods of price analysis have many points of confluence: places where they meet to reinforce and corroborate the other.

Another instance in which historically Eastern and Western approaches overlap one another, though their mathematical bases were developed independently is Ichimoku Kinko Hyo and Fibonacci studies, specifically retracements and fans.  The 3H chart from the past few days displays this very well:

Self-fulfilling prophecy, as those critical of the conception fibonacci numbers map the structure of the market as they do the natural world allege?  The traders flooding the market with long orders at the 76.4% retracement level of a movement down and those long off the top of the Cloud at Senkou Span-A where 76.4% and Senkou Span-A overlap are – in effect, though not by explicit intent – co-conspirators?

Fascinating questions, as ever; too bad I have neither the time or dedication to work at answering them, though I have a better grasp of why they interact as they do than time permits writing here.  But whatever the exact basis of their relationship, whether as a natural function of the marketplace or as one of the epiphenomena given off by the inexorable yet unwitting collective consciousness of the market, a remarkable confluence exists between them that can be exploited profitably.

Ichimoku Kinko Hyo: GBP/JPY – 01/18/2009

Ichimoku Kinko Hyo captures valuable information on just about any timeframe, but granularity builds below the 1H chart (and certainly below 15M) to a degree rendering the overlay mostly useless.  IKH’s versatility may indeed lend itself to scalping applications – certainly the history of the overlay itself demonstrates an outside-the-box approach can beget useful innovation – but whatever the case, for as a trader carrying on an outside daytrading/swing-trading rhythm, beginning with the 1D, then drilling down to 4H/3H and 1H for execution is very effective .

GBP/JPY has come to a significant medium-term way point.  Just about any method available to technically evaluate the pair bears this out with some clarity, IKH among them.

The Guppy topped out in early August at 215.89.  In the upper left corner of the chart, price can be found ranging around Kijun-Sen (the squiggly red line) just above the Cloud (kumo).  August 1o-12 emerge as tentatively crucial days: price closes below Kijun on 08/10 (Kijun cross), confirms a close below the Cloud on 08/12 (turning price orientation bearish) and Tenkan-Sen (squiggly blue line) is found to cross beneath and then begin diverging from Kijun.  Each of these points communicate a high probability that a (at least near-term) top has been put in.  Once Tenkan and Kijun are pulled beneath the Cloud following their bearish cross, the downturn they connote is well underway.

IKH: GBP/JPY 1D

Price moves into a Kijun cross-up (a bullish signal on for the Kijun Cross method) only once during the remainder of 2008, but is pushed back after a failed attempt to close the gap at 08/28-08/31.  No other IKH components signal bullish, keeping the IKH position trader in their short.

Then, after the first throwback from 130 during the illiquid Santa Claus rally sessions of 12/29 forward, the flattening grade GBP/JPY moved through since the beginning of November became highly evident as price crawled to within 700 pips of Senkou Span-A (SS-A, the green line bounding the bottom of the Cloud ).  

Today price is again doing something it did not between August-December: challenging Kijun with cross-up pressure.  Tenkan and Kijun are flat as the pair’s range continues to tighten (relative to the period of August-November).  The Chikou Span (light blue line) demonstrates price is in a nervous general state of equilibrium over the past several trading weeks.  

Collapsing our frame of reference considerably, the 1H chart zooms in on GBP/JPY’s latest pivot off the ~129-130 bottom put in last week.  The rectangle range characterizing 01/13 to the end of London 01/15 was broken in afternoon NY trading as price moved into and broke above Senkou Span-B (SS-B, the yellow line, always above SS-A during established donwtrends, bounding the top of the kumo).

IKH: GBP/JPY 1D

JPY continues to give way before GBP through the Tokyo until reaching ~135.50, a significant short-term line in the sand where price wound through a rectangle on its way down on 01/11-01/12, and further back the site of a pullback bottom, morning doji star/bullish engulfing pattern on 01/06.  Tenkan-Sen crossed above Kijun just as the lines broke above the cloud, confirming the bullish advance price began several hours previous.    

Price then pulled back to 132.50, 50% fib retracement for the move from 129 to 135.75 before moving to retest this evening.  This dip brought the 9-period Tenkan tumbling toward the 26-period Kijun which was still averaging the almost wholly uninterrupted 20-hour move to 135.75.  With the retest, Tenkan again emerges on top.  

The question then becomes: is today’s test of 135.75 a double top in the making, keeping the 1D picture unchanged, or is the higher low and identical highs under an IKH-bullish about-face late last week on 1H indicative of a continuation in the correction from 129 that will breakout above 135.75?  IKH points toward the latter scenario. 

Both charts demonstrate how cross strategies such as the Kijun price-cross and the Tenkan-Kijun cross can work well on their own and with compounded benefit if viewed together, explaining their status as basic staple strategies among IKH practitioners and building blocks within more sophisticated methods.

A Deeper Look at Ichimoku

I’ve incorporated Ichimoku Kinko Hyo (IKH) as an ongoing feature of my analysis regime for about 6 months; and while often including the overlay on charts posted, my conception of what IKH is communicating is something I don’t usually mention.

Given the remarkable insight IKH offers, along with its relative obscurity and daunting appearance, I think it’s time to change things up.

My plan (maintaining some degree of pragmatism) is to post a thoroughgoing IKH analysis every couple of days or so: probably for GBP/JPY, EUR/USD and a handful of others. I’ll be dipping into other pairs and maybe even other markets, but only insofar as intermarket analysis improves comprehension of some correlated pair(s) – e.g. equities vis-a-vis carry pairs.

I don’t employ many tools to analyze, execute on and manage through, but there’s certainly more to how I go about things than IKH. While I think Ichimoku can stand alone, I also use S&R, fibonacci studies, candlestick and chart patterns, looking for unanimity and confluence to disregard (what I think are) less probable trades. And sometimes, it actually works out.

Along the way, then, I’ll be bringing all of this together, while giving IKH more explicit treatment.

IKH Resources

For a primer on IKH, the best singular resource I’ve found online is the Ichiwiki.

As TLT pointed out some months ago, Nicole Elliott’s Ichimoku Charts is the best treatment of IKH currently published in English in bound book form. While Elliott has made invaluable contribution on behalf of students of IKH in the English-speaking world, I look on her book more favorably because of the sheer dearth of IKH material in publication in English, rather than true expository merit. As trading books go, it can be acquired for a relatively cheap price, and whatever its faults is indispensable for any IKH chartist without competency in Japanese.

Chris Capre holds a weekly webinar on FX Street called “The Weather Report” that covers the basics of IKH. As webinars go (always excruciatingly slow), the material is decent and Chris an able analyst, even if there is nothing so novel being presented as Chris suggests. But then, that’s the staple of anyone hawking fee-based mentoring, signals services and system packages via the “free” education carrot.

Out of time, so a chart for now, and the first formal installment this evening.