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A lesson on trading with the stochastic indicator on the GBP/JPY by:  James ‘Big Dog’ Boyd.

The stochastic is a great tool to monitor the trade to see how much room we have left to go up or down. The stochastic again tells us the bullish or bearish sentiment in the trade. In this example we look at both bearish and bullish examples on the GBP/JPY.

GBP/JPY Chart #1

Caption #1: 1- GBP/JPY short at a diagonal level of resistance on April 6th. 2 – MACD confirms rollover, stochastics crosses to the downside. 3 – GBP/JPY pair selling off at resistance.  Indicator Settings: MACD Hist setting = 6,13,9 and Slow Stochastics setting = 5,3.

GBP/JPY Chart #2

Caption #2: GBP/JPY confirms a stochastic “pinch” after 5 days (April 13th).  Once the stochastic pinches we have 2 options… 1) Exit the trade.  2) Make sure the stop is appropriate.

When the stochastic is oversold, buyers in this case buy the GBP/JPY.

 ***KEY*** Watch the width between the 2 lines of the stochastic. When the GBP/JPY falls, monitor the trade by looking at the separation between the stochastics (you may have not hit your stop loss at this point). If the 2 lines are still apart they have potentially some room to drop. If they pinch, BULLS are buying the GBP/JPY back. If that’s the case, invoke # 2.

GBP/JPY Chart #3

Caption #3: GBP/JPY confirms that it is going to hold the higher low. Stochastic crosses back up representing that bulls are coming back into the trade.

If the stochastic cross back down, you have a greater chance in getting stopped out.

REMEMBER, when the stochastic pinches like in photo #2, we have 2 options — 1) Exit the trade 2) Make sure the stop is appropriate.

 

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293homealone121107.jpgWell, maybe while you were getting ready for bed. The Federal Reserve Bank decided to make an emergency move this evening and cut the bank lending rate to 3.25 percent from the 3.50 percent it was at earlier. This move made by the Fed was meant to “try” and create some stability in the financial markets. Also, at the same time, Bear Stearns (BSC) is being bought out by JP Morgan (JPM) at a steal of a price. This last minute buyout and the move by the Fed (who also approved this buy out by guaranteeing the deal with $30 billion) had an immediate effect on the overseas market and crushed the dollar. The EUR/USD hit a high of 1.5905 and the YEN hit 12 year low against the dollar at 95.74. Gold also was trading (at time of posting) around 1,026 an ounce. (I guess there goes the gold teeth I was considering!)

One way to help you against the falling value of your dollar is to hedge against it with the other currencies like going long the Euro or even long the Yen. Any trading against the dollar seems to be the most logical move. When asked what should be done about the financial crisis in the US, Federal Reserve chairman Ben Bernanke said “I don’t know!” No wonder the dollar is crashing and the basic carry trade is dead.

Well, hedge your bet for now or wait and see if the fed moves some more on Tuesday with another cut of 75 basis point. Bernankes strategy seems to be trying to keep the economy supported and worry about inflation later. We may see on the EUR/USD 1.6000 before Tuesday if the market sees even more weakness. Also, the USD/JPY may see an even lower level below 95.00 as weakness in the dollar continues. Tomorrow is a new day.

~ G

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eurjpy.jpg The pair broke down from a triangle and is heading back up and is now at resistance. Is a retest in the cards? We’ll see. Examples of possible, simple entry signals in line with the trend are in the green ovals where the fast stochastic line crosses below the slow line. Notice how we are looking to “buy in” to the current rise for a better price, after we see a bounce down and an entry signal.

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gbpjpy.jpg Looks like we are getting a bounce lower off a small resistance level on the GBP/JPY, unsurprisingly. All is well with the downtrend.

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candle.jpg Candle hunting sounds like some sort of freaky hobby, when really we’re talking about looking for candle patterns.

The AUD/JPY has had a couple in recent bearish bounces.

First off, to be clear, the trend is down and that’s the mood we want to be in here (… not down, but bearish) Name of the game is to find a bearish signal.

Candles are NOT the entry signals. They do not supersede the studies and are not stronger, technically, than either the studies or support and resistance.

Candles are meant to be little helper bees, confirming other stuff. If you get a signal, it is more powerful accompanied bya candle pattern.

audjpy.jpg Case in point, if using the MACD and Stochastics, they both rounded lower heading for red arrows as the price bounced down from resistance recently. There’s an entry signal. They were accompanied by a beautiful evening star (first green oval on the price) and by a so-so harami (second price oval). I put ovals on the studies showing the entry signals that occurred with them.

audjpysignals.jpgHopefully we will see some another candle pattern with a bounce down in the next day or two. The candle pattern that just happened today? A hammer.

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gbpjpy8.jpg After the carnage in stocks today (more later), the GBP/JPY is eyeing the downside again. If you traded the pair on the hourly chart, you were stopped out in the last few days. But oh, what a run! And if you gave back too much in gains, time to devise an exit strategy that captures more of the move.

And so I present … the GBP/JPY hourly triple top! Ta-da! Notice where I drew support (“neckline”) to breakout from, and the green oval target below, which by the way, happens to be at another support level: the turning point bottom.

Most other crosses have remained in the dumps, it’s the pound that’s shown some strength. But the fundamentals of the pound remain week, and some short term strength is nothing to be excited about. It’s born out technically in the trend on the daily chart. As we get into the Asian session tonight, I’d like to see the break of this triple top as Asian investors jaws’ drop from seeing the damage in US stocks and their own follow suit.

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intrmarket.jpg Today is the first day I look at the S&P500 ($SPX) – representing the average of US stocks – and think “this may be a pennant”. If I can get a triangle shape out of short term support and resistance, it’s a pennant. And price coiling like this at support is pretty threatening to that support. Not good for stocks.

Interestingly, I found myself thinking of the GBP/JPY which already broke lower. US stocks may be a bit of a “barometer” for other markets, but smart money often leads in other markets, such as currencies. Looking at the GBP/JPY works just fine because it is a major carry pair. The carry trade is a canary in the market mine: it is very sensitive to global economic changes..

leadership.jpgIt’s a negative feedback cycle. Odds of stocks breaking lower increase with the pennant coiling at support, and the break lower already of GBP/JPY. If stocks do break, this will fuel GBP/JPY further.

* By the way, I don’t say this enough, but if you’re new to trading do not feel like you have to know all of this! All different people read this blog, and the intent is education. I find things like this intermarket analysis business give me a little edge here and there in trading. The great bulk, though, is mastering a trading style by sticking with certain rules consistently. Then you add little stuff like this. Keep reading things like this with your “observer’s cap” on and it gradually sinks in.

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