Trading Rules

PICK YOUR SPOTS - If you think USDJPY is due for a correction, you may be right. However, that doesn't mean we'll get that correction any time soon. The break above 122.00 this week was a big deal, and when you break levels like that after the market had been trading sideways for so many months, you are going to get a fresh influx of larger buyers who are playing the breakout and positioning for another big move towards 130.00. The USDJPY long trade has been a favorite across many institutional desks and there is a lot of money flowing into the short Yen bet(i.e. Long USDJPY). So make sure you understand that if you are trying to sell USDJPY, you better pick your spots right, or else you could get run over. I'm not against selling USDJPY for a short-term, counter-trend play. You just have to isolate good entries and wait for the right moments.

ONE AND TWO - Just a quick reminder about how I look to take short-term, counter-trend positions. I will use three indicators for my analysis. The first indicator is ATR (Average True Range). If a market is trending hard in one direction, I will take note but won't do anything at all. I will only begin to get interested for the most part if the daily ATR for that market has been exceeded. So as an example, if the daily range (ATR) for USDJPY is 65 points and USDJPY hasn't moved 65 points from high to low on that day, I won't be interested in trading it. But if I look and see that USDJPY has been trending upward and has also exceeded its 65 point average daily range, I will start taking a closer look. Why? Because now I know this is a market that has already seen a lot of good trading for the day and could be poised for a reversal. The second indicator I will look at is an RSI. Now we all know that technically, 70 is overbought and 30 is oversold. If I see the ATR for USDJPY has been exceeded and the hourly RSI is trading 70, I still won't be interested in trading it. But if I see the ATR has been exceeded and the hourly RSI for USDJPY is tracking around 85, I will start to get very excited about selling into the up move. To me overbought and oversold are more 85 and 15 respectively (especially on hourly charts).

THREE - But there is one final indicator to watch. And that's 'time.' Time is also very important. When I say 'time,' I am talking about the 'time' of day. If the ATR has been exceeded and the hourly RSI is 85, but it's past 1pm New York time, I will likely hold off from taking the trade. When trading markets, it's so important that we have the benefit of deep liquidity and volatility. Generally speaking, after 1pm New York time, you really don't get either. And so, taking a trade that is unlikely to produce any meaningful follow through until Asia the next day, when at that point, the RSI will already be much lower at around the same price, is just not a good idea. Sure it may work sometimes, but I don't love the risk/reward in that scenario. Trading is hard enough as it is and it's important to try and get as many things in your favor as possible before jumping in. So just to review, the daily ATR should be exceeded, the hourly RSI should be either around 85 or 15, and the time of day should be before 1pm New York. Hope that helps a bit. Email me with any questions.