Richard Krivo, Author at Algorithmic and Mechanical Forex Strategies

Five Different Dojis

July 26, 2015 by Richard Krivo Leave a Comment

Any doji candle signals market indecision and the potential for a change in direction by price action. (Always bear in mind that the “potential” for a change is not a guaranteed change in direction.)

Doji’s are formed when the price of a currency pair opens and closes at virtually the same level within the timeframe of the chart of which the doji occurs. Even though there might have been quite a bit of price movement between the open and the close of the candle, the fact that the open and the close takes place at almost the exact same price is what indicates that the market has not been able to decide which way to take the pair…to the upside or the downside.

Let’s take a look at the doji highlighted on this historical 4 hour chart of the AUDCAD below…

At the point where the doji occurs, we can see that price has retraced a bit after a fairly strong move to the downside. If the doji represents the top of the retracement (which we do not know at the time of its forming) a trader could then interpret the indecision and potential change of direction and short the pair at the open of the next candle after the doji. The stop would be placed just above the upper wick of the doji. In this case, that trade would have worked out nicely.

Keeping in mind that the higher probability trades will be those that are taken in the direction of the longer term trends, when a doji occurs at the top of a retracement in a downtrend or the bottom of a retracement in an uptrend, the higher probability way to trade the doji is in the direction of the trend. In the case of an uptrend the stop would go below the lower wick of the doji and in a downtrend the stop would go above the upper wick.

Dojis are popular and widely used in trading as they are one of the easier candles to identify and their wicks provide excellent guidelines regarding where a trader can place their stop.

Below is an example of a Standard Doji candle…

The Long Legged Doji below simply has a greater extension of the vertical lines above and below the horizontal line. During the timeframe of the candle, price action dramatically moved up and down but closed at virtually the same level that it opened. This shows the indecision between the buyers and the sellers.

The Dragonfly Doji below can appear at either the top of an uptrend or the bottom of a downtrend and signals the potential for a change in direction. There is not line above the horizontal bar signifying that price did not move above the opening price. A very extended lower wick on this doji at the bottom of a bearish move is a very bullish signal.

The Gravestone Doji below is the exact opposite of the dragonfly. It appears when price action opens and closes at the lower end of the trading range. After the open the buyers were able to push the price up but by the close they were not able to sustain the bullish momentum. At the top of a move to the upside, this is a bearish signal.

The 4 Price Doji below is simply a horizontal line with no vertical line above or below the horizontal. This would be the ultimate in indecision since the high, low, open and close (all four prices represented) by the candle were exactly the same. It is a very unique pattern signifying indecision once again or simply a very quiet market.

The basic rules we learned about trading a doji at the beginning of this article would apply to each of these unique dojis as well.

All the best and good trading…

Richard Krivo

@RKrivoFX

RKrivoFX@gmail.com

A Personal Trading Process

July 12, 2015 by Richard Krivo 6 Comments

Once I have identified the pair that I feel has the strongest trend based on the Daily chart, I will usually enter on a 4 hour or a 1 hour chart – whichever time frame best optimizes my entry. Here’s I am looking for chart by chart…

The Daily Chart:

chart 1

The trend on this historical Daily chart of the NZDJPY is down. This determination is made based on the pair making lower highs and lower lows, price action is below the 200 SMA and is pulling away from it and, at the time of the analysis, the NZD was the weakest currency and the JPY was the strongest. Also, looking at Slow Stochastics, I see that it is below 20 with angle and separation to the downside – a very bearish sign.

Given all of the above, I know I will only be looking for opportunities to sell the pair as they will have the greater likelihood of success.

Trading in the direction of the longer term trend offers us that edge.

The 4 Hour Chart:

chart 2

Then I will look to the 4 hour chart and look for a retracement (a move against the Daily trend) to be finishing and beginning a new move to the downside. In other words, a fresh move back in the direction of the Daily trend. Sometimes that fresh move will present itself straightaway or I may have to wait for the setup to take place.

In the case of this particular 4 hour chart I would need to wait for the pair to cycle back up as a new move to the downside has already taken place over the last five red candles on the far right of the chart.

I will also run through this same process on the one hour chart looking for the same set up. Once a “fresh move” begins on either the 4 hour or the 1 hour chart, an entry can be made with a stop placed above the highest level of the recent retracement. (Stochastics, MACD, RSI can be used to further time the entry.)

The 1 Hour Chart:

chart 3

In the case of this 1 hour chart, I would be waiting for a pullback/retracement to take place to short the pair.

Since the pair has been in a strong, on-going downtrend on the Daily chart, I would have been able to successfully sell the pair at any of the points on the chart after the retracement (black arrows) takes place. The short position would be opened when momentum shifts back to the downside (Stochastics crossover within the black circles). In each instance the stop would go above the most recent high approximately at the black lines.

@RKrivoFX 's personal trading process: http://t.co/vE1TI0Fc3M
— OneStepRemoved.com (@_OneStepRemoved) July 13, 2015

Sidebar: Some traders will become frustrated when they see price is moving opposite the direction of the Daily trend. Don’t worry about it. It is fine since that means a retracement is taking place and once that is complete, we will be looking at an opportunity to enter the trade in our direction of choice – the direction of the Daily trend.

Effective Trendline Navigation

June 24, 2015 by Richard Krivo Leave a Comment

As with virtually any trading scenario, we must first determine the direction that we need to trade the pair for the greatest likelihood of success.

By looking at the historical 4 hour chart of the GBPUSD below, there are several reasons we know that we want to go long (buy) the pair. Price action is above the 200 Simple Moving Average and is pulling away from it. The pair has been making higher highs (green lines) and higher lows which indicates an uptrend. Also, at the time of this chart, the GBP was the strongest currency and the USD was one of the weaker currencies.

All these point to a buying opportunity.

But, the question remains, when do we enter the trade?

Here’s where we bring in the trendline…

Let’s take a look at the historical 4 hour chart of the GBPUSD pair below…

We can see that price action has come in contact with trendline support at several points – note the blue boxes.

Since price has tested and respected the trendline for at least three “touches”, we know that our trendline is valid.

Our entry strategy to buy this pair using trendline support will be to wait for price to trade down to the trendline and into the “Buy Zone”. If price trades into the Buy Zone and stalls and a candle does not close below trendline support, just as in our blue box examples, we can take a long position on the pair with our stop just below the trendline or just below the lowest wick that penetrates the trendline.

The trader could exit the trade if price reaches resistance, the previous high, or by employing a simple 1:2 Risk Reward Ratio.

Now let’s take a look at a historical 4 hour chart of the USDCHF for an example of selling against Trendline Resistance in a downtrend…

This trading scenario will be virtually the opposite of what we did in the previous buy example.

We want to sell the pair a it has been making lower lows (red lines) and lower highs. Price action is below the 200 SMA and pulling away from it. Also, at the time of this chart, the USD was weak and the CHF was strong.

Again, price action has tested our resistance line at several points (the blue boxes) so we know the trendline to be valid. In this example we would wait for price to trade up to trendline resistance in the “Sell Zone”. As long as a candle does not close above the trendline, we would sell the pair with a stop just above the trendline or just above the highest wick to penetrate the trendline.

The trade could be closed should price reach the previous low or we could use a 1:2 Risk Reward Ratio to exit the trade.

RKrivoFX@gmail.com

@RKrivoFX

An Indicator Never Knows the Trend – But YOU Do!!

June 11, 2015 by Richard Krivo 2 Comments

Many traders who I have worked with over the years ask how much attention should be paid to an indicator.

It’s a great question since many traders, especially newer ones, literally become obsessed with their indicator(s) of choice at the expense of everything else. When the indicator shows buy, they buy. When the indicator shows sell, they sell. And this reaction largely ignores whatever may be happening on the price chart.

Always remember that price action, the direction that the pair is moving, is our primary indicator.

Price is indicator #1…first, last and always.

Therefore, what the informed trader needs to do at the outset is determine the trend – the direction that the market is moving the pair.

Let’s take a look at the historical Daily chart of the CADCHF pair below…

We can clearly see the pair is in a downtrend. Price has been making lower highs and lower lows, it is trading below the 200 SMA (green line) and pulling away from it. This indicates that bearish momentum is gaining strength.

Since this is the case, we know that we only want to look for opportunities to sell the pair.

Now that we have identified the trend, we can make infinitely more effective use of our indicator of choice. In this case our indicator happens to be Slow Stochastics set to 15,5 and 5.

Here’s how we are going to “fine tune” the use of that indicator: we are only going to take selling signals and ignore the signals that tell us to buy the pair.

Each of the signals in the black circles would be the selling signals. And, as you can see, a short position could have been taken successfully on each one.

The buy signals in the red boxes are to be ignored in a downtrend.

Keep in mind that a trader can still have a losing trade even when taking a higher probability entry. However, the likelihood of having a successful trade will be enhanced (not guaranteed) by entering trades in the direction of the trend.

Remember, the indicator has no concept of trend, it only reflects momentum.

As traders, it is up to us to determine the trend and then use our indicator of choice to only take trades in that direction.

RKrivoFX@gmail.com

#RKrivoFX

Where Are the Trades?

June 4, 2015 by Richard Krivo 7 Comments

An issue that I personally had when I began trading was what to do when a trade did not present itself on the charts. After all, I wanted to be a trader and here I was…at my computer and ready to trade!

So…where are the trades?!?!

A few weeks ago, this issue came up with one of my clients. Essentially they had done the Strong/Weak Analysis and then mentioned, “but when I pair up the currencies and look at the charts I don’t find a single trade according to my strategy…very frustrating…what should I do?”

No doubt about it, when you are ready to trade but find no trades it can be very frustrating. But we simply cannot take a trade because we want to trade. That is one of the most illogical reasons to enter a trade that there is.

Think about it this way…

Let’s say we are driving a long distance and getting extremely bored and frustrated because we are not there yet. And we know that up ahead someplace we have to make a left turn to get to our destination. Would it make any sense at all just to make that left turn right now out of boredom and frustration? Of course not. The same is true in trading. It makes no sense to enter a trade until the set up is there.

We must guard against boredom and frustration as it can lead to taking trades that made no sense earlier in the trading session when we were not bored. But, human nature being what it is, the more bored and frustrated we become, the better that low probability trade begins to look. So we take the trade out of boredom and when it moves against us, we become even more frustrated.

It is important to develop patience and discipline as a trader so we can wait for our set up to take place. (We must also be ready to accept the fact that our set up may NOT take place.) We must have a firm understanding of our trading strategy and not get into a trade until our “set up” takes place.

As an old trading axiom states, let the trade come to you.

For example, let’s say my trading strategy dictates that I buy a certain currency pair if it closes above 1.5153. If it is now trading at 1.5100, I will not enter the trade now because it looks like it might trade up to that level. Nobody knows what may or may not happen going forward on the chart. So, based on my trading plan, I would not consider an entry until it closed above 1.5153. That is letting the trade come to us. We will not enter a trade until it meets our criteria.

Bottom Line: No matter how bored or frustrated we become, that is never an excuse for entering a trade.

Based on our trading style we may have to wait hours or days or longer for our trade set up to present itself. Until that time, we must resist the temptation to enter a trade and always remember that cash is a position.

We get paid to wait…

RKrivoFX@gmail.com

@RKrivoFX

Optimizing Slow Stochastics Crossovers

May 24, 2015 by Richard Krivo 3 Comments

Since price on the historical Daily and 4 hour charts of this AUDNZD pair are making lower highs and lower lows and are trading below the 200 SMA as well, we are only looking for opportunities to short the pair…we want to optimize our strategy.

When using Slow Stochastics in a downtrend, as we have on the chart below, the optimum sell signal given by the indicator occurs when the two moving averages comprising the indicator have been above 80 and then move below 80.

Conversely, when using Slow Stochastics in an uptrend, the optimum buy signal given by the indicator occurs when the two moving averages comprising the indicator have been below 20 and then move above 20. This condition can be seen on the historical 4 hour chart of the USDCAD pair below…

Since the above signals are the optimum signals, not as much attention is paid to the crossovers that occur between the levels of 20 and 80. How should a trader react to those?

While “mid-level” crossovers are valid technical trading signals, in my opinion, they do not offer as much “pip-potential” as do crossovers occurring at the 80 or 20 levels.

Allow me to create an analogy…

Think of the lines (moving averages) that comprise Slow Stochastics as a string on a bow that is used to shoot an arrow. The farther that the bowstring is pulled back, the more power it has behind it and the farther the arrow will go. With this in mind, look at the optimum Sell Signal on the chart above and compare it to the Mid-Level Crossover. The crossover that takes place above 80 will have more downside momentum associated with it than will the mid-level crossover that takes place between 20 and 80. The bowstring is not pulled back nearly as far.

While both are valid signals to short the pair, the signal with the most pip potential behind it is the one that had the greater amount of momentum. In this case the pullback to above the 80 level would present the trade with the greater pip potential. While it is not an absolute and will not prove to be true each and every time the condition presents itself, it does represent a “trading edge” that I believe is worth taking.

For the above reason, I generally do not take mid-level crossovers as entry signals in my own trading. Rather, I exercise patience and discipline and wait for the higher probability signal to set up.

Good trading,

Richard Krivo

RKrivoFX@gmail.com

@RKrivoFX

What’s the Main Advantage of Trading with the Trend? PIPS!!!

May 19, 2015 by Richard Krivo 4 Comments

Whenever currency pairs begin strong trending moves, traders will ask about the merits of the old trading adage, “the trend is your friend”. What does the trend have to offer? What not trade against the trend as well as with the trend and make pips going both ways?
A valid question to be sure…

While pips can be made trading counter trend, they will definitely come with a greater amount of risk.

Essentially, when taking trades in the direction of the trend, the trader has the “push”, the momentum of the market behind their trade. Since a major trading objective is to mitigate risk, one way we can do that is to eliminate trades that are against the prevailing trend.
When trading countertrend there is less momentum pushing in that direction since such a trade is going against the majority of traders in the market at the time. As such, the dominant trend can kick back in at any time quickly negating some/all profits which may have been earned by trading against the trend.

Also, when a trader knows that they have the “market behind their trade” when trading with the trend, they have more confidence to stick with the trade and let it mature as opposed to closing out the position too early.

Lastly, countertrend entries need to be much more precise since you are trying to time an entry while it is moving in the opposite direction that the market has been taking the pair over time. (Think of a relay race – is it easier/more forgiving to pass the baton to someone running in the same direction as you or someone running in the opposite direction?)

Entries with the trend can be much more forgiving.

Let’s take a more in depth look at this idea using a historical Daily chart of the USDCHF as our example…

The approximate number of pips in each move to the downside – the direction of the overall trend – is shown in green. The approximate number of pips in each move to the upside – counter trend – is shown in red.

While we can definitely see that pips can be made trading countertrend, 4,070 in this example, there is a very significant difference in the number of pips earned by the trader who only took trades in the direction of the trend.

Based on this chart, trading only with the trend would have accumulated 7,755 pips – about 90% more.

Admittedly, 4,070 pips is nothing to turn up one’s nose at. For me however, factoring in the greater risk of more precise entries and the need to spend more time monitoring the trade even more closely, I’ll stick with trading in the direction of the trend.

RKrivoFX@gmail.com

@RKrivoFX

Breakout Trades and the Power of Price Channels

May 5, 2015 by Richard Krivo 3 Comments

When price channels (sometimes referred to as Donchian Channels) are placed on a chart, they identify the high and the low price at which a pair traded over a specified period of time. The Channels on the Daily chart below are set to 20 periods so they would represent the high and the low at which the pair traded over the previous 20 days.

As such, they can be used quite effectively to visually identify levels of Support and Resistance on a chart. The channels can be used by “breakout” traders to identify entry levels. This would occur when price “breaks” below support in a downtrend or above resistance in an uptrend.

When the breakout occurs, this can be taken as an entry signal as the potential exists for price to continue to move in that direction for a period of time.

Let’s take a look at the example below of Price Channels on this historical Daily chart of the EURCAD…

As noted on the chart, the lower channel line represents support while the upper channel line represents resistance.

As with most every strategy, the first step is to determine the direction that we should trade the pair.

In the case of this EURCAD pair we know we want to look for opportunities to short the pair for the following reasons: 1) Price Action is below the 200 SMA and is pulling away from it; 2) at the time of this writing the EUR is weaker than the CAD; and, 3) price has been making successive lower highs and lower lows since the end of February.

Now that we have determined the direction to trade the pair, we can look to a lower time frame chart to “fine tune” our entry. For our purposes on this pair, I prefer the 1 hour chart as we may be close to an entry.

When moving down to an intra-day chart (anything below a Daily) we will change the indicator to 55 periods. We do this to slow down the indicator a bit as we have moved to a “faster”, lower time frame chart.

If/when price breaks below the lower channel line at 1.2940 on the historical 1 hour chart above, a trader could sell the pair. The stop would be placed above the upper channel line at 1.3041. As can be seen, the price channels have provided us with our “breakout” entry along with our stop placement.

The trade would be closed when price action retraces to the point that it intersects the upper channel and triggers the stop.

While there are numerous ways to manage a trade, the above method adheres to “true Donchian strategy” as put forth by Richard Donchian.

Richard Krivo

@rkrivofx

Want a Faster Entry Signal? Try MACD Histogram Bars

April 19, 2015 by Richard Krivo Leave a Comment

Traders who use the MACD indicator often are critical of the fact that it will signal an entry after the initial move has begun and, therefore, pips are left on the table. As such, many traders wanting to enter a trade sooner dismiss it as a “lagging” indicator.

In the case of the MACD indicator, the most widely used entry signal is when the MACD line crosses over the Signal Line in the direction of the Daily trend. Since these two lines are simply two moving averages, by their very nature the crossover will not occur until the move itself is under way. And, since that crossover is the entry signal, this will put the trader in the trade after the initial move has begun. Some traders prefer this method of entry as it offers more confirmation that the move is more likely to continue in that direction.

For more aggressive traders…

…who are not interested in the additional confirmation and are simply looking for an early entry, they may prefer a less widely used entry signal based on the histogram bars.

As seen on the historical 1 hour chart of the EURUSD below, as soon as price action begins to move to the downside, the green histogram bars will begin to shorten. As soon as a bar does not close above the previous bar, that means that the upside movement by price has subsided for that moment in time. An aggressive trader can use that as a signal to short the pair at that point.

For greater confirmation of the histogram entry…

Traders who are a little less aggressive may prefer to wait until a few histogram bars – perhaps 3 to 5 – in a row close continually lower in a downtrend or continually higher in an uptrend. This will provide greater confirmation than just one histogram bar but generally will be a quicker entry than waiting for the MACD line to crossover the Signal Line. As can be seen on the chart below, although the bearish move has begun, the crossover entry signal has not yet taken place.

Note how a trader entering based on the histogram bars would have entered the trade ahead of a trader who entered based on a MACD/Signal Line crossover.

Each of the above entries based on the MACD is a valid entry. As usual, it is up to each individual trader to decide which one is right for them.

Keep in mind however that entering a trade sooner means entering with less confirmation. That is not always a good thing.

All the best and good trading…

Regards,

Richard

RKrivoFX@gmail.com

@RKrivoFX

Basic Fibonacci Strategy

March 30, 2015 by Richard Krivo 3 Comments

You probably have heard the old trading adage: when trading in the direction of the trend, it is beneficial to the trader to buy on dips in an uptrend and sell on rallies in a downtrend. I would totally agree with that.

The part that can be challenging when implementing the above, is knowing how far a pair is likely to retrace before it begins moving back in the direction of the dominant trend.

First of all, no one knows with any certainty how far a pair might retrace. However, as traders we can make some educated assumptions.

When it comes to making informed assumptions about retracements in trading, we can thank Leonardo Fibonacci – arguably the most talented mathematician of the Middle Ages.

1170 – 1250

To learn how we can put his knowledge to work in our trading , let’s take a look at the historical 4 hour chart of the GBPCHF currency pair below for an example…

Since the Daily chart on this pair is in a downtrend, we know that we only want to look for opportunities to sell this pair as that would be the higher probability trade. For our example, let’s look at the bearish move that the pair recently made between point A and point B on the chart. Having seen that downside move and then seeing price action begin to retrace to the upside, the prudent trader will be wondering at what point the upside move will subside and stall. They will want to know that because once the pair stalls it is at that point that they can short the pair back in the direction of the Daily trend.

While no indicator or trading tool can offer absolute, unassailable data on when the retracement will end, the Fibonacci tool can shed some light on the situation and provide three levels that the trader can monitor.

By drawing our Fib line in the direction of the move between point A (Swing High) and point B (Swing Low), we can see that the three primary Fib retracement levels are placed on our chart: 38.2%, 50.0% and 61.8%. It is these levels that we will monitor.

(In an uptrend we would draw the Fib line from the Swing Low to the Swing High.)

Ideally, we are looking for a pullback (retracement) to at least the 50% Fib level or, better yet, the 61.8% level. The further price retraces before it stalls, the greater the likelihood that the pair will drop further and continue its move in the direction of the Daily trend. We can see on this chart that price action cooperated nicely and retraced to above the 61.8% level before making a strong move to the downside.

When using the Fib tool, we are looking for price action to stall at one of the Fib levels – the higher the better.

Since in our example we have a couple of long wicks at the 61.8% level, a trader can decide to short the pair at the close of the candle with a stop just above the highest wick.

While this is by no means a fool-proof method for entering a trade, it does provide some helpful information for a trader who is attempting to gain insight on the question of a likely retracement level.

All the best and good trading,

Richard Krivo

RKrivoFX@gmail.com

@RKrivoFX