“USD/JPY” CURRENCY PAIR TREND ANALYSIS
Stocks are down 38% as
Housing Bubble bursts. Housing prices fall 90% in some cities as consumers
and businesses alike are underwater on mortgage debt. Bank balance sheets
balloon with toxic assets awaiting write-downs. Consumer confidence is
eroding. Sound familiar? But these are not our news headlines from a few
years back. These were the news headlines in Japan in 1990, some twenty
the model for super successful business strategies, was in full economic
breakdown. The stereotype of the “Salaryman” working five and a half days a
week for one company for a lifetime was in jeopardy. Newer generations
wanted no part of this work ethic, nor did they procreate enough to support
future social security and tax liabilities. The resulting recession lasted
fifteen years, ending in 2007 when the rest of the world found itself
hanging on a precipice similar to Japan’s 1990 version.
To many, the “Great
Recession” has replayed many of the same scenarios as in Japan some twenty
years back, but on a global basis this time around. Advanced economies of
developed nations have been mired in tepid recovery plans, trying every
monetary and fiscal trick in the playbook to turn their respective economies
around. As Japan sat on the sidelines, most analysts expected the U.S
economy to pull out of its ditch and speed past Japan. However, the “USD
chart depicted below does not bear out these sentiments for the past year:
The Dollar actually
peaked back in 2007 at 123 Yen, but has been on a decline ever since the
Lehman Brothers failure. For eighteen months from 2009 into early 2010, the
Yen tested the “90” level, finally falling to new record lows and forming
the descending triangle illustrated in the above chart. The anticipated
breakout from that pattern materialized in November, but a new channel
quickly formed, only to witness another brief upward breakout as shown.
Enthusiasts of forex trading hat have gone long on the Yen have profited
handsomely from that strategy for the past several years. The question now
is where will this currency pair head next?
Japan recovered from its
prolonged recession without major structural reforms and was only recently
as the number two economy in the world. The country still imports
basically all of its energy and commodities. Japan’s land mass is smaller
than California, and only 15% of that is inhabitable, which must also be
shared with agriculture. Effeciency and effective use of all resources,
though emblimatic of the culture, are more a necessity than a way of like.
Although officials were slow to respond to the latest global recession,
Japanese businessmen have been quick to adopt Western ways. Personnel
budgets have been slashed at unprecedented rates, including summer bonuses.
Supply chains and distribution channels have been restructured. Corporate
Japan is leaner and meaner these days, and more than ready to face new
competitive challenges around the planet
Although most believe the strong Yen has bottomed, it is never wise to
underestimate the prowess of the Japanese to adjust to new economic
situations. The experience gained during their prolonged “balance sheet
recession” is immeasurable. The fact remains that the “79” level was never
tested during recent pricing behavior, and the market’s inability to gain
ground is worrisome. Sideways market action is too reminiscient of last
year’s long-playing record.
While the United States wallows in high unemployment and ever-increasing
budget deficits, one has to wonder why this pair would ever move north.
Another round of quantitative easing will not help either. Be cautious if
lows are tested again.
traders swear by it. In fact, many claim it to be the most important habit
that they have developed over time to ensure their success. What is deemed
to be a habit that you cannot do without? Backtesting is the consistent
reply by those in the know.
straightforward definition of the word from an Internet dictionary is as
is a process, usually performed with aid of computers, by which traders try
to estimate how financial instruments would have performed in the past had a
particular mechanical trading system been employed to trade them.”
commodity traders observed pricing patterns tied to the seasons centuries
ago, the art of technical analysis has evolved to a level of sophistication
that has produced thousands of signal indicators for the purpose of
prudently guiding a trader’s entry and exit in any market. Everyone,
including those involved in
seems or wants to believe that there is a Holy Grail out there that will
produce instant wealth, if only it could be found.
behavior never moves in a straight line, but in zigzag patterns that
resemble waves. These waves, like all waves that occur in the natural
world, are produced by the ebb and flow of buying and selling forces in the
market, searching for a balance point. Technical analysts have studied
these waves and can predict with a high degree of probability the future
direction of such prices when certain conditions exist. The objective then
becomes finding the right “system” or combination of signal generators that
give accurate guidance more times than not.
obviously test out their theories using broker demo accounts and real time
trade data, but that process could take years to perfect. If going forward
takes too long, then going backward must be the answer. By testing a
“trading system” with historical data, a trader can fine tune his
parameters, measure his success rate, and prepare for a real time test using
real money. Sounds like a logical plan of attack, but does it work?
with, it would help if you had a programming background. The first task is
to assemble a database of historical forex trading data. This task is not
as easy as it sounds. The forex market is not centralized. Various data
reporting services “buy” their data from a variety of banking participants
in the interbank market. There are no reliable sources for accurate data.
The data you get is reflective of the point of access, nothing more, nothing
less, and variations are to be expected. In fact, there may be gaping holes
in the acquired data, and depending on the timeframe, you will have millions
of items to deal with, thereby requiring something a lot more sophisticated
than an Excel spreadsheet.
accept the historical data that their
forex broker can provide, usually two years worth, but only for a few
trading pairs. The highest volume pair is the “EUR/USD”, but traders tend
to prefer the “GBP/USD” pair since there is more volatility and opportunity
for profitable trades. Assuming that you get past the historical data
requirement, there are three basic methods for backtesting:
Manual Testing: Yes, the old tried and true manual approach is one
way to go. It does take time, as you have to bring up the data elements one
at a time, allow your system to generate signals as you scroll through data,
and then record your results. It is time consuming, but you are building
valuable trading experience as you slog through the data;
The preferred method is to use software designed for the process. It
produces results as if you were in a real trading environment. The product
mentioned most in review articles is “Forextester”;
OK, if you are not a programmer, this is not an option. But if you are,
then you can design something that appeals to your personal needs. However,
the automation of trades does not always replicate how you might react in a
trading environment, so there are more variables to consider.
issue with backtesting is that the past is no guarantee of how the future
will unfold. For example, if you had chosen to use data over the May/June
period of this year, the European debt crisis would have skewed the test
data enormously and given mixed results for backtesting.
The fact is
that situations are always changing and shaping price behavior accordingly
in our markets. However, the general experience and confidence that can be
gained in a trading system by backtesting are benefits that most likely make
the process worthwhile. Confidence leads to consistency, the primary goal
in every trader’s plan of attack.