Trading the US Dollar's Next Move with Ichimoku

02/27/2014 9:00 am EST

Focus: FOREX

2014 has already provided traders with strong moves as institutions and individuals alike try to get positioned for the big moves of the year, notes Tyler Yell of DailyFX.com.

In late 2013, many banks and analysts were singing the praises of the US dollar, based on the anticipated effect of tapering the easy money policies by the Fed. The taper came, but so did weak US data, and the US has dropped since the taper was announced on December 18, 2013.

However, a few months later, the US dollar sits at a key juncture that could determine the direction for the next few weeks or months. A few tools show that a bearish bias is the most prudent view for US dollar but Ichimoku is yet to confirm that view. As a trend-following indicator with a momentum component and trend filter, we’ll look at what needs to develop before a trader should look to get carried away with a short US dollar bias according to Ichimoku.

USDollar 2104 Opening Range – Bearish Bias
If you’re unfamiliar with the Opening Range Strategy also known as ORBO, it is a breakout strategy. Most commonly, ORBO is an intraday strategy for traders who don’t like to hold risk overnight but would rather capture the meat of intraday moves. However, the concept applies to more macro strategies as well such as weekly, monthly, or annual opening ranges.

USDOLLAR Opening Range

chart
Presented by FXCM’s Marketscope Charts
Click to Enlarge

The power of ORBO lies in the fact that large institutional traders know that the best way to make large sums of money in the market begins with losing very small sums of money, which means that you get out of a trend when it goes against you. Above, you’ll notice the range for 2014 takes the high and low of price for the first two weeks of 2014 bracketed by vertical lines. Once you’ve identified the opening range, you then apply a volatility filter that is often a percentage of the average true range, plus a time component so that if a breakout of price and time hold, then you can count the breakout as legitimate.

The key levels from an ORBO perspective on US dollar are as follows:

Opening Range High: 10,728
Bullish Volatility Filter: 10,762
Opening Range Low: 10,619
Bearish Volatility Filter: 10,585

You can see above that we had a bearish opening range break through the volatility filter of 1xATR, which is the teal box below the OR. From a bias perspective, this means that large institutions are unlikely to get long USD against most currencies until bullish life is already being shown. To invalidate the bearish focus on US dollar at this juncture, you would need to see a breakout above the bullish volatility filter of 10,762 yet until then the bias would be for further US dollar weakness.

Ichimoku Shows Low USD Upside Momentum
Ichimoku is multiple indicators wrapped into one. The cloud provides you a bias for the overall trend and if price is above the cloud, then your inclination should be for trend resumption and higher prices and if price is below the cloud then the safer bet is to look for lower prices in the near future. The component that many traders learn to love with Ichimoku is the lagging line that acts as the momentum component to Ichimoku.

USDOLLAR is Turning Down According to Ichimoku

chart
Presented by FXCM’s Marketscope Charts
Click to Enlarge

Above, you can see two highlighted sections where the lagging line sat in the cloud showing a critical momentum juncture on the chart. The first highlighted section broke through in September 2013 and price pushed through the cloud, causing the US dollar to drop 300+ points. If the US data continues the trend we’ve seen in thus far, another drop could be in store of similar size. What’s more, in October 2013 when the US dollar was searching for a bottom, many majors like EUR/USD hit multi-year highs but another drop in the US dollar index could see the highs in late 2013 surpassed.

Ichimoku Trade Idea for the Next USD Move

chart
Click to Enlarge

Ichimoku Trade: Sell US Dollar If Lagging Line Closes Below Cloud ~ Price < 10,520

Stop: 10,600 (Technical Invalidation Point on the Chart & 38.2% Fib Recent Move Lower)

Conservative Limit: 10,450 (76.4% Fib Retracement of Oct. ’13 Range)

Aggressive Limit: 10,350 (61.8% Fib Expansion off July ’13 high, Oct. ’13 Low, & Jan. ’14 Lower High)

If this is your first reading of the Ichimoku report, here is a recap of the traditional rules for a sell trade:

  • Price is below the kumo cloud (Showing you a clear downtrend or bearish stance)

  • The trigger line (black) is below the base line (light blue) or is crossing below

  • Lagging line (bright green) is below price action and cloud (This is the trade trigger)

  • Kumo ahead of price is bearish and falling (red cloud = bearish Kumo)

FX Traders In United States: If you cannot trade the US dollar index because you are in the United States yet want trade ideas off the USD index then you should look to either GBP/USD, AUD/USD, or NZD/USD.

Alternative Scenario: If the bearish breakout does not materialize and 10,520 doesn’t break, then a move above 10,650 would invalidate current downtrend and break above 2014 opening range buy trigger of 10,762 would trigger a bullish reversal for 2014.

By Tyler Yell, Trading Instructor, DailyFX.com

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