ZoneTraderPro

The Yen Carry Trade Charts

The importance of the Yen Carry trade to the ZoneTraderPro system can not be illustrated any better than by looking at the charts from 1-23-08. The S&P futures had a range of nearly 85 points on the day, opening on the lows, trading 50 points higher, 40 points lower, and then making a 75 point rally, starting at 1245 hours and closing at the highs of the day. The reason for the rally was news about the financial sector.

The Yen Carry trade is the borrowing of Yen and receiving those proceeds in Euros. Those borrowed funds are then risked in the stock market.

There are 3 scenarios that can occur.

The Yen is moving .10-.25 on a 15 minute chart in either direction. When this occurs, both types trades, both trend and counter trend can be taken.
The Yen significantly weakening. When you see a .30 or more move on the 15 minute bar, or if you have 2-3 bars that are up .75 to 1 big handle, the likelihood of a short trade working is very small.
The Yen significantly strengthening. When you see .30 or more move on the 15 minute bar, or if you have 2-3 bars bars the are down .75 or more, the likelihood of a long trade working is very small. After the initial move down, you then need to be worried about illiquidity volatility. The traders that were providing the support and resistance in the Super Dom are now gone, and illiquidity volatility will follow.

We will start looking at the carry trade at 1245 on 1-23-08. Here is the 15 minute chart of the afternoon. Notice on the 1245 hour bar, the market tested the lows and closed on the highs, a very bullish candlestick bar.

Now let's look at the ES chart for that same period. The 5 minute YenEuro chart is the chart on the right. The first thing to notice is the short trend trade trading into a typical reversal after 2.75 points of profit, and reversing the short trend. That makes sense because the Yen made a low, then closed on a high. At 1249 hours, the counter trend trade goes 5 ticks in the direction of the trade, and reverses. Two buy signals are then given as the Yen continues to rise. What is also very important to note is the illiquidity volatility as noted by the large number of color bars. Remember, the Yen has been strengthening all morning, and the professional traders that participate in the Yen carry trade are missing. The last important point is the amount the yen has weakened, about .50 in 20 minutes, which is significant.

Continue to Page 2