Some thinking out loud on USD/JPY

Trading Discussion
1

Just to start off, this isn’t about my trading signals, but more about some of the bigger issues that i’ve realized i’ll have to consider when actually trading these signals.

I’ve been analyzing USD/JPY for the past month, looking for indicators and such that help me predict major trend reversals. I’ve been looking at the 1hr, 2hr, 4hr, and daily charts. I have a slightly different system for each chart, but with the same underlying goal.

I like the short-term charts (1hr/2hr) because I barely have to worry about cost of carry, especially for my short signals. Problem is, as you’d expect, the signals are not as surefire, and the winning % is lower. However (so far) they are still profitable. Are they more profitable than the longer-term charts? It appears so, technically speaking, but since these charts give signals at all hours of the day, I don’t believe I would actually catch all these trades, so likely the profitability has been overrated.

Now my daily system, that’s given me 100% wins. Problem? 5 valid entries in the last year. That makes me a little uneasy however, since I have no BAD entries upon which to adjust the system. But the daily system is the simplest, and requires barely any attention to the charts at all (just a daily check, since I only open positions at the close of a candle anyway). Back to the other problem tho, cost of carry. 3 of 5 have been shorting signals, and since these have averaged 2 months in length, the carry cost would be significant. They still appear to be profitable, but the inherent risk is still a lot higher.

In conclusion to all this brain-babble, I’ve come up with 2 ideas.

  1. To only trade long-signals (on all charts). This would cut my valid signals in half, but would eliminate any complications due to cost of carry. Personally, I prefer the simplicity, even if it cuts a little into my profitability.

  2. To trade long-term and short-term simultaneously. However, My broker won’t let me have 2 opposite positions open at the same time, they just cancel out. I believe I could get the same effect though. Eg. If i have a 5-lot long-position open, then decided I want to go short in the short-term, I could sell those 5 lots (and have no positions) and then Buy those 5 lots back when the price fell to my “target”.

So I’m wondering, does anyone here trade only long/short signals? And/or trade long-term and short-term at the same time? I’ve also thought about finding a different pair to trade short-term. Perhaps modifying my system for the pair would save me time overall, compared to the confusion of trading the same pair??

Sorry for the long read here! But i’d love to hear anyone’s thoughts on any of this mess i’ve got running here…

2

Why not open a second account with a new broker,who knows the service may be better or they may even allow long and short trades at the same time

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  1. To only trade long-signals (on all charts). This would cut my valid signals in half, but would eliminate any complications due to cost of carry. Personally, I prefer the simplicity, even if it cuts a little into my profitability.

Interesting. So, your daily bar method would leave you with two long trades each year? Keeping track of forex is a lot of work for a handful of trades a year. Is it possible that your entry criteria are too conservative? Maybe a couple of the “daily chart” guys on the forum will share a few of their experiences.

On the plus side, you can monitor more pairs if you only look at daily charts. Perhaps you can apply your system and generate trades in several pairs. (Check into which pairs have pos or neg correlations. You may be able to balance your overall account carry across pairs.)

  1. To trade long-term and short-term simultaneously.

Many brokers are now allowing “hedging”, and even suggesting it as a strategy for balancing your margin on a long term position during a retracement. I haven’t done the homework, but at first glance it may be more cost effective to close a trade and then re-enter, or just weather the drawdown.

Hope this helps.

4

Well I think I’ve come up with a lot of solutions since my first post, including some of the things you just mentioned.

I’m now working on the daily charts exclusively, and to increase my signal count, I decided to work with USD/JPY, EUR/JPY, EUR/USD, and GBP/USD. This isn’t as much hassle as it seems, since my system is pretty simple and its the daily chart. Also, I “loosened up” my indicators. So now I’m getting more signals (about 10 per year per pair), which are shorter term (no more than a month). So this partially handles my concerns with carry cost and lack of signals.

Instead of getting rid of short trades altogether, I have a “biased indicator” towards buy signals, which essentially weeds out most of the short signals, but still allows the ones that give really “good” signals. Also, I’ve decided to use Fibonacci retracement as a means of determining my exits (which makes sense since my system is based on trend reversals). And I use the 0.5 as a P/T for short signals, and 0.618 as a P/T for long signals to further favour the long trades, which I’ve noticed “bounce” harder than my short signals. And to note, my S/L is exactly 1/2 of my P/T just as a rule, to keep a good risk:reward ratio.

I’ve also considered fine-tuning my Fib. retracements by figuring out the “average max. retracement” which might end up being more or less than 0.618 for instance, but for now, the default levels seem to work pretty good.

And also I should note that my system for USD/JPY and EUR/JPY is identical, as is the one for GBP/USD and EUR/USD (with the exception of some Fib. retrace levels). As is, scanning the chart for signals takes 5-10 min a day, a very reasonable time investment I’d say. Since I’ve just penned out my system, I haven’t done any tallies on pip profit, but overall it looks pretty good. The win% is about 75%, which combined with the set risk/reward ratio, gives me the idea that this could be pretty profitable. I’ll post pip profit for each system as soon as I can.

One more thought before I shutup. Some of these buy/sell biases are based on long-term (years) trends, and I suspect that over the years I’ll have to modify these biases to reflect prevailing trends or interest rate changes. Thus said, I see a pretty universal system that seems like it could well stand the test of time in the FX. And if anyone is interested in the indicators, I’d be glad to share, since I’ve pretty much decided on those now.

Sorry bout’ the length gang! Hope this is mildly interesting to someone

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Always looking for new tools to add. Please share your ideas and indicators.

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Okay, cool. Here’s the breakdown…

I use RSI(EMA) and DMI (directional movement index) exclusively.

for USD/JPY: RSI(10) and DMI(7). I get a pre-buy signal when RSI goes below 30 at the same time that DMI is above 30, then buy when RSI crosses back over 30. I get a pre-sell when RSI goes above 85 while DMI is above 30, then sell when RSI crosses below 70. And to note, I only take a signal as valid if the candle has closed.

for EUR/JPY: exactly the same as for USD/JPY

for GBP/USD: RSI(8) and DMI(6). I use the same DMI>30 “confirmation” and RSI cross-overs. Except RSI has to go below 20 for a buy signal now, and RSI only has to go over 80 for a sell signal. As you can see, there is no buy/sell bias (which there is for EUR/JPY and USD/JPY), and the indications are essentially mirrored for buy and sell.

for EUR/USD: exactly the same as GBP/USD

I think this is a little out of the ordinary, since I’m basically using RSI as an oscillator. I know these both measure trend strength, but what I’ve noticed, if you separate the values a little, the RSI can shoot above 80 while the DMI is still below 30, then fall down again, which helps me avoid fakeouts. When they allign, I know there is a very strong trend, and then I start looking for the retrace. When RSI crosses back over the 30/70 level, I can generally expect the retrace to continue to the retracement level I pick, 0.618 for instance. I think 70 is a good balance between getting a reliable signal and getting a signal early enough to profit from it.

Different pairs retrace differently, depending on the buy/sell signal too, which is why each has its own tailored retracement level. Overall, I’m banking on the idea that if something rises/falls too fast, too much, there has to be some form of retracement, and if you know when to catch it, you’re gonna make money! Good luck, and of course this is open to any kind of critique and comments :smiley: