The cornflower trading system is probably one of the best ema based forex systems and has been discussed a lot at the forex factory . I say it’s one of the best because I prefer simplicity in my trading rather than having one million indicators all saying one thing.

It is just a good basic ema crossover system and I like it so far.

It uses four ema’s

• 8 ema – which is supposed to show the fast money in the market
• 12 ema – which is supposed to the trend for the past half day
• 24 ema -
• 72 ema – showing the main trend in the market.

Cornflower Original System Rules

The original cornflower system is applied to only the 1 hour charts and the 30 minutes charts, though we have managed to use it very well in 10 min charts, 60 min and Daily charts which we prefer .

Pullback Entry

1. The 8, 12 and 24 ema’s are all above or below the 72 ema. In our xtick we have made this easier for you .All you have to do is to look at the oscillators at the bottom panel and if they are all in the same colour ( red for downtrend and green for uptrend ) , you have the right trading setup.
2. Price pullsback or retraces back to the 12 or 24 ema .The more aggressive the trend the shallower the pullback ie 12 ema.
3. Enter for 20 pips or hold depending on trader’s judgement of the strength of the trend.

Initial Crossover Entry

1. Price shown by the candle has moved above or below the 72 ema and closed near the top of it’s range.
2. 8, 12 and 24 ema are all pointing in the direction of the price move. Here with xtick ,you can use the first panel at the bottom to see the move.
3. Enter for 20 pips and hold if the trend continues.

Nia Cornflower rules

The system is fine as is and if followed with proper money management can be profitable. However the entry rules to me were still ambigous and having to wake up at 3am est is not a time for me to start guessing . So I added the parabolic sar just to confirm especially the aggressive entry.

I also changed the time period from 30min and 1 hour to using 60min, 30 min and 10 min timeframes. 20 pips is too small to trade using only one time frame as the original system suggested.

1. Only enter if the parabolic sar aggrees with you especially on the 10 minute chart and agressive entries.
2. Move your trade to breakeven as soon as the parabolic sar moves against your entry trend.
3. Only enter the market when all time frames are in the same direction. This avoids the problem of overtrading. So if the 60 min trend is down and the 30 min trend is down, follow the entry rules on the original cornflower system.

From the above chart, we see that though point A might have been an entry with the original cornflower, we did not enter until point B when all the rules on the nia cornflower were satisfied. It was a quick 20 pips.

You can download the original cornflower system at out downloads page.

The Australian Dollar is flying to new highs due to increased demand and
prices in the natural resources arena.  The Australian export list is half
natural resources, the remaining is made up with the booming Cotton
markets.

As prices rise greatly in metals such as gold, which is a top Australian
export, the dollar moves to near parity against other currencies like the
US dollar.   Australia’s oil exports are also bringing in more money than
ever expected.

The Australian dollar is following a near perfect trendline straight
towards probable parity with the US Dollar over the long run.  Experts
believe strong fundamentals will bring a thriving economy to Australia
which has benefited greatly from the growth of Asia, specifically China.

The only thing left in the way of the extreme growth rates is China’s
currency, the Yuan, and its ties to the US Dollar.  As the dollar
devalues, so does the Yuan which is heavily tied to the US Dollar while
still being valued against a basket of other currencies.

The commodity markets are thriving due to the rebuilding of places such as
Louisiana, Indonesia, Mexico and other places affected by natural
disasters.  Expect the Australian dollar to take a short fall during
profit taking but then continue its upward swing.  The prices of
commodities wont be going down any time soon.  The $89 barrel of oil has
confirmed this.

When we discussed the top 5 ways To Improve your Mental Forex trading we saw that it is important to understand your trading system and from the discussion on how to setup a forex system # 4 we continue with the first indicator we shall be using.The Forex Fractals

What is a fractal

A Fractal is one of five indicators of Bill Williams’ trading system, which allows to detect the bottom or the top.
These basic fractals are composed of five or more bars. The rules for identifying fractals are as follows:
* A bearish turning point occurs when there is a pattern with the highest high in the middle and two lower highs on each side.
* A bullish turning point occurs when there is a pattern with the lowest low in the middle and two higher lows on each side.

Using the forex usdchf daily chart below we see an example of a Down (bearish) Fractal at point A and an exmple of an Up ( bullish ) fractal at point B.

How to Trade Using Forex Fractal

Fractals essentially break down larger trends into extremely simple and predictable reversal patterns.You can use them for in various ways.

1. Finding the Forex Trend

What other indicators work with Fractals ?

1. Trendlines

Most new traders do not know how to draw a proper trend line. by simply using only the bars with the fractal arrow as your trendline points, it makes your forex trading very easy. The example in the forex chart below shows the last up bullish trendline drawn from fractal.
The trendline is from point 3 to point 4

2. Other Indicators are

Moving averages
Bill Williams Awesome Indicator
Bollinger Bands
We shall discuss these later.

In yesterday’s top currency news, we discussed how major banks can see the yen carry trade coming back.

A Carry Trade is simply an investment strategy where one borrows an asset at one interest rate, sells the asset, then invests those funds into a different asset that generates a higher interest rate yield. Profit is acquired by the difference between the cost of the borrowed asset and the yield on the purchased asset.

Though most currency traders have the notion that it only applies to the forex market, in actual fact, it is played out everyday in our lives. For example banks borrow cheap (at the low overnight rate, i.e., the rate at which they pay depositors) and lend expensive (at the long-term rate).The annoying thing about this scenario is that they tend to lend to the depositor. The bank borrows from the depositor at say 3% or from the intra bank market, and gives out a car loan to the same depositor at 6% , making 3% .

Since the Bank of Japan reduced their interest rates to 0% , the yen carry trade is the most popular form of this strategy. Put simply, the yen carry trade is borrowing at low interest rates in yen and using the loan to buy higher yielding assets elsewhere.

In the Carry Trade, speculators buy high interest currencies and sell currencies with low interest rates. These positions ensure that each trading day rollover-interest will be posted to the trader’s account. Thus the Carry Trade has the potential to significantly enhance a trader’s return.

Perhaps the most popular form of the strategy exploits the gap between US and Japanese yields. Anyone borrowing for next to nothing in yen and putting the money into US Treasuries (US government bonds) has received a double pay-off: from an interest rate difference of more than three percentage points and from the dollar’s rise against the yen. Investors make their profit when they reverse the trade and pay back the yen loan.

For example, a trader borrows 1,000 yen from a Japanese bank, converts the funds into U.S. dollars and buys a bond for the equivalent amount. Assuming the bond pays 4.5% and the Japanese interest rate is set at 0%,[4] the trader stands to make a profit of 4.5% (i.e. 4.5% – 0%), as long as the exchange rate between the countries does not change. Leverage can make this type of trade very profitable. If the trader above uses a leverage factor of 10:1, then he/she can stand to make a profit of 45% (i.e. 4.5% * 10). However, if the U.S. dollar were to fall in value relative to the Japanese yen, then the trader would run the risk of losing money. Furthermore, because of the leverage, small movements in exchange rates can magnify these losses immensely unless hedged appropriately.

For the forex trader, the most fundamentals that one really needs to know is the interest rates for each pair one is trading. To become a successful carry trader, understanding the role that interest rates play in the FX market is a crucial task. A country offering high interest rates will attract more capital as investors seek to capitalize higher returns. As interest rates rise, investment will follow, which can in turn increase the value of the currency. Carry trader’s main focus becomes the expectation on the direction of a country’s interest rate, to ensure their high rate of return.

We shall be discussing later in the carry trade series specific examples on how to set up a carry trade.

So far the current price is at 1.20819 for some 76 pips ahead and the stop loss is at 1.2034 for 30 pips set profit. We are looking for some 20 more pips to call the week quits but so far so good.

We shall be posting screen shots of the trade set up as well as the real trading account later today.

Forex Trade Update

As promised earlier the set ups were as below based on the new trend2 forex template

Figure 1 is the initial trade on August 13th

Figure 2 is the current position

You may follow the trade at the forex forum

Professional trader and author Peter Bain’s Video Forex Course demonstrates simple yet powerful pivot currency trading systems used by professional traders.

sell usdchf at 1.2054

I shall post the trade setup charts later after I wake up. However for the purposes of this Japanese open session just buy gbp and sell chf . The targets are the simple ema crossever 10/20 ema on a 15 minute chart

The chf set up chart

The GBP set up chart

In the meantime please find as much information as you can on

1. Fractals
2. Bill Williams Awesome Indicator
3. ADX
4. Fibonacci Retracements
5. Fibonacci Extensions
6. Daily and Weekly Pivot Points

as you can as the next section will be delving in depth into these indicators

For those that use fibonacci trader, the eco would be a great indicator to study

The Basic Entry Trading Rules

We have discussed the first section on how to setup a trading system. This is our example trading system in which the main goal is to discuss the main items I think about when designing a trading system.

For those that use xtick proffessional I will download a template and a how to in the forum tommorow afternoon so as to create a simple visual set up that would allow you not to have to look and search for where the ma crossovers and the rsi above 50 areas are.

Professional trader and author Peter Bain’s Video Forex Course demonstrates simple yet powerful pivot currency trading systems used by professional traders.

The Trend Indicator

The most sort after forex technical indicators are trend identifying indicators. In all forex forums ,there are new "non-lagging" trend indicators being advertised. I prefer to keep things simple ,stupid (KISS) . I don’t know of any indicator that can foretell the future yet and have discovered that the simplest systems are used by the best traders. Nothing complicated or that has never been used before is on my trading charts.

When designing a system ,I am normally looking at trendlines, channels, moving averages, MACD, RSI, ADX and if I’m trading stocks and futures I will consider volume and volatility when I’m thinking about the system. I can choose one of these trend indicators or a mixture of some . Not too many though maximum 3. In our test trading system, we are going to consider 10 ema, 20 ema and RSI 45. The charting package we are going to use is xtick, however you can use any forex charting package you wish.

One point to note, if your charting package has an indicator that cannot be used any where else, then you are looking for the forex HOLY GRAIL. As we all know it, doesn’t exist. The indicators we are going to use can be found on any forex charting package eg xtick, metatrader, tradestation ,esignal etc. One of the reasons being that I like trading futures ,stocks and options too, I am in the school of thought that the best indicators only need a tiny change to work on any market.

RSI

The rsi was introduced J. Welles Wilder and is otherwise known as the Relative Strength Index. It is an extremely powerful momentum oscillator. Most technical traders use the rsi as a overbought or oversold momentum oscillator. However in our case we are using it as a long term trend indicator. If your charting package allows you to set up the rsi in exponential rather than simple rsi , that’s better for the system.

So far we have the 10/ 20 ema crossover and the rsi 45 as our trend indicator. Next we shall discuss how to know what the trend is.

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A forex trading system has 4 major indicators.

• The Trend Indicator. – This tells you the general direction of the market and can be one indicator ,or a combination of indicators. Price action can also help in showing you the underlying trend.
• The Entry Signal. – An entry signal indicator basically tells you when to enter the market. It is normally advicable to have only one indicator for this so choose wisely.
• The Exit Signal – This will be either a take profit exit or exit trade in a loss. I prefer only using a maximum of 2 indicators for this. It’s just keeping it simple.
• The Money Management Plan – Otherwise known as the trading plan. Now if you don’t have this, don’t bother trading forex. It has been shown that most traders lose because they never thought of a money management plan or a trading plan. It should consist of " if .. then " statements. Make it so simple that your kid will be able to follow it at anytime.If your 6 yr old kid can not follow it ,then it is not a trading plan.