TECHNICAL ANALYSIS
Macd to either crossover or switch back through the zero line is another option. Figure 3 shows how, although the timing was not perfect the trade
may have survived. Certainly there were less false dawns.
My preferred solution is to take a similar concept to the Macd but in a more sophisticated way. This uses what is called the Kase Peak Oscillator@. In Cynthia Kases excellent book, Trading with the Odds she explains her complete trading methodology more comprehensibly, but on a more simplistic basis, this study takes a multiple number of moving averages, creates an in analysis of trend cycle length, and includes a calculation for volatility skew. What this does is create an oscillator that has superficially similar properties to the Macd. However, in addition it places a line which represents 2 standard deviations around that. Her theory states that once momentum has moved beyond 2 standard deviations of its own momentum, mathematically we are now at an extreme. If a trend cycle is being fulfilled (65 bars), then what she calls a Peak Out occurs (the purple line). This mean that this is the extreme or there is one more extreme due in this trend cycle.
FX
Figure 4
Returning to the chart and figure 4 we can see the KPO@ and the KCD@. This latter indicator tracks the Momentum change in the oscillator itself. The Peak Out or oversold situation is flagged a little early and is followed shortly afterwards by the KCD switching to over zero. This means that the trace of momentum is now positive from negative. We are now in the situation where this is the low or there is one more low in this trend cycle of 65 bars. The 2 vertical lines represent that figure. As can be seen in figure 4, whilst its exact point is slightly off balance, the trader is now in the position of linking this analysis together and looking for other timing indicators to confirm the trade. There are two black arrows under the candles. These use a very simplistic and my original method of quantifying divergence. It uses a standard Rsi and states that price is making a 9 bar low but the Rsi is making a 3 bar high. There is no value placed on what the value of the Rsi actually is. Two days later the cycle is complete with the trade being false if price breaks the absolute low of the trend.
Figure 3 Shaun Downey FX TRADER MAGAZINE July - September 2010 9
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