Tuesday, April 8, 2014

Technical Analysis: Flag and pennant on cable | A textbook trade on the Yen

Cable, so called in the Forex community because GBPUSD was the first instrument to be the subject of electronic exchange, which was carried out via an undersea cable across the Atlantic, has recently formed two classic Technical Analysis patterns. One of them has already fulfilled the prediction that is inherent in it, while it remains to be seen if the other will do so.

They are a flag and a pennant, and they are illustrated on the weekly chart above. In the case of the flag, the price movement from A to B is considered to be the “flagpole”, and the expectation in the classic case is that price should continue to move in this direction. As can be seen, it proceeded to do so.

The pennant has the same expectation. If this Technical Analysis theory has validity, the exchange rate of the GBPUSD pair should proceed in the upper direction when the tip of the pennant is reached. Identifying the tip is not, of course, a perfect science.

Two things need to be pointed out here: One, Technical Analysis pattern expectations are not always observed in practice and two, this particular pair has been at a significant resistance level, which it has yet to break out of in a compelling manner, for some time. You can see our analysis of it here.

A textbook trade on the Yen

We have been working with the Dollar Yen pair (USDJPY) for some time, in the expectation of a rise in this unit. To that end our Mandelbrot algorithmic routine took a position in the middle of March.

We would have liked this pair to trend and we can only envision this happening, in the case of USDJPY, right now, in the upward direction. When that fails to come about, for one reason or another, Mandelbrot is programmed to make the best of the situation.

The story told by the chart above is a textbook example of a Mandelbrot outcome where such a trend failed to build. Half the position was taken off, as a matter of principle, when profit reached 2% of equity and the remainder was left in place to catch the trend, should it develop. When it failed to do so, Mandelbrot closed out the entire at the second level shown. In this way we wind up with a decent profit on the trade and, which is of crucial importance, we also preserve our equity, allowing Mandelbrot the luxury of continuing to monitor the situation and to eventually take full advantage, whenever this pair does decide to take off.

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