Jan 29

Trends: Can’t Fight Them, CAN Follow Them

Yesterday I introduced The System That Trades When I Wouldn’t, a simple trend following system of 10 futures. Today I want to show one of the current open positions it has in the Japanese Yen. It’s short and the position is doing well.

For those who aren’t familiar with currency trading the financial media will typically talk in terms of the currency pair USD/JPY, but when we take a trading position it will be in terms of JPY, so if we want to ride an uptrend in USD/JPY we short the Yen. I will be showing it both ways here to help demonstrate the trend.

This is USD/JPY over the last 4 months. Beautiful isn’t it? As a trend follower you live for charts like this, this is what you should always want to see, something that goes from the bottom left of your chart to the top right, doesn’t matter what the timeframe is, it can be minutes, days, weeks, months, years, it’s a trend. Recognize it, acknowledge it, and learn to love it, because as is often said, ‘trends persist’ and ‘the trend is your friend.’

Here it is in context of a weekly chart showing the last 12 months. Look at the Stochastic and RSI measurements below it. From the very first move above 80 there are many who would have been telling you it was short-term overbought. Now let me say, I have nothing against those indicators, both Stochastics and RSI are excellent indicators developed by giants in the field of technical analysis, but coming as they do as standard tools in trading platforms they are often used or interpreted incorrectly. My point is, overbought can remain overbought for a long long time. Never use that as reason alone to enter a trade, or even to NOT enter a trade in this case. The overbought condition of Dollar/Yen would have had you miss this entire move so far by waiting for a pullback.

This example should also demonstrate not only how hard it is to take the trade in the first place, but equally how hard it can be to stay with a winning position. It’s moved straight up for 12 weeks, you’re not tempted to ring the register? Of course you are, you’re human. Thankfully your system isn’t.

Now let me show you how this trade unfolded, we’re now looking at this the other way round in Yen futures.

Picture the scene, it’s early November you’ve thought for a while that Short Yen would be a great trade, your trend following system took a position in the last few weeks but got you back out for a small profit. Then the Japanese PM announces he’s open to dissolving parliament and analysts expect more pressure on the BOJ to ease policy. BOOM, BOOM, in two days the Yen gets slammed, you would have been making twice as much now in your position from the previous week. It goes lower for another 3 days, it’s now heavily oversold, everyone’s looking for a bounce, and ping! you get the signal right at the bottom right of the chart to Short Yen. Do you take it?

Well of course you do, you’re a trend follower now, you know to ignore news and views and just do what price is telling you. Look at it now. Making over $15,000 for a single contract. Yes, 1 contract. That is a massive move in any asset class but especially in currencies. How many times during that trade so far do you think it’s looked oversold and ready for a bounce? You can also see the trailing stop signal up at 1.16, this thing has some room, there will be bounces on the way but that gives us enough room to tolerate their likely magnitude.

Because here’s the punchline, as big as this move has been already, if I’m allowed to offer an opinion I honestly think it’s only just begun. Look at Dollar/Yen on a 20-year chart. Each bar here is one quarter, so the period we’ve been looking at up to now is all contained in just the last two bars on the bottom right. Still think it’s overbought?


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