From the August 01, 2006 issue of Futures Magazine • Subscribe!

Summer forex fireworks!

As we approach the height of the summer season, forex traders take time away from the day-to-day rigors of trading. It’s challenging to take time off from trading forex because it’s a market that never really stops. Currency flows do not take summer vacations. A sudden reminder of this nature of forex came with the North Korean testing of missiles during the July 4 holiday. The firing of missiles presented classic “moment of opportunity” or “fading the news” trades. It was an example of how technical analysis and fundamental insights can combine to the advantage of a trader.

Japanese Defense Agency Director General Fukushiro Nukaga said the first six missiles are believed to have been fired between 3:30 and 8:20 a.m. Tokyo time. This translates to 4:30 to 9:20 p.m. EST on July 4. Like a brick thrown at a tree causing the birds to fly to safety, at first the reaction in the forex market was a flight to quality. This was seen across markets; gold reacted as a traditional safe haven and gapped up to $631 per ounce from $613.

This kind of reaction is a common phenomenon in response to all surprises and part of the chemistry of forex. First there is a reaction and then there is the diffusion of that reaction. The challenge for the trader is to find the post-reaction pattern that confirms an opportunity. Using political analysis, it was obvious immediately that the firings were “failures.” Applying this logic, the initial surge in price direction would by any analysis be expected to reverse. But the key question is what currency pair should be traded? How can one confirm the best moment of entry?

Since Japan was the most directly affected country, it is appropriate to look at the yen. Before looking at the technicals of the USD/JPY, a trader on July 4 also should have known about the July 3 Tankan Survey (a key business sentiment survey in Japan), which reported a propensity by manufacturers to increase spending by 11.6%. The increase was higher than expected. With a strong Japanese economy in place and positive expectations, fundamental forces favored a strengthening yen. So the missile firings represented an outlier event that the forex trader could read as a further confirmation to short the USD/JPY pair. After selecting a direction to trade, the trader needs to find the moment of opportunity.

The Korean missile firings present an opportunity to apply the use of Renko charts. Renko means brick in Japanese and they are available in many platforms. Essentially, a currency pair represented as a Renko chart shows the ability of the price to sustain consistent moves. In a Renko chart, the trader can adjust the settings to show only a preset incremental move.

In “Profiting brick by brick,” Renko bricks show a series of up and down “lines.” A brick is added to another brick, only if the price closed by a preset prescribed amount or greater. In this case, 3 pips. What Renko charts achieved in the case of the Korea missile firings was the ability to map market sentiment at small time frames, such as one- minute, which usually shows a lot of noise.

Using a Renko chart, we see the post missile firing reaction in the yen experienced persistent bear sentiment. We see 13 sequential up Renko bricks, then an attempt to reverse. It was a small attempt with only one reversal brick down. But when two Renko bricks reversed, the trader sees retracement sentiment is stronger and uses that event to enter a sell order. A stop should be placed above the previous high at 115.25. Armed with Renko charting, the trader had a navigable map to trade and fade the USD/JPY after the missile firings.

The fundamental/psychological sense that the reaction to the missile firing was fadable was also confirmed in gold. Using 30-minute Renko charts with a setting of $0.50 per ounce of gold for each Renko block, we see several opportunities for sell entry points, selling when a second brick is added to the downside. This rule can vary based on a trader’s aggressiveness.

As in all aspects of technical analysis, multiple confirmations and risk controls are key to shaping a high confidence trade. By using non traditional analysis of price action such as Renko charting, forex traders can consider moment of opportunity trades that surprise events will likely continue to present us under current volatile geopolitical conditions.

Abe Cofnas is president of learn4x.com LLC and author of Understanding Forex: Trading to Win. E-mail: learn4x@earthlink.net.

About the Author
Abe Cofnas

Abe Cofnas is author of “Sentiment Indicators” and “Trading Binary Options: Strategies and Tactics” (Bloomberg Press). He is editor of binarydimensions.com newsletter and can be reached at abecofnas@gmail.com.

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