Tag: SMA

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Forex Basic Strategies

Combining The ‘Rail Road’ Trading Pattern With Pivot Points To Generate Accurate Trading Signals

Introduction

Introduction

Introduction

In the previous set of articles, we discussed strategies based on most of the technical indicators in forex. But there is one technical indicator that was not covered extensively and, i.e., the ‘Pivot Points’ indicator. Traders do not use it extensively because they don’t know the right way of using it and are not aware of their strength.

Today, we solve this problem by discussing a mostly based strategy on the Pivot Points indicator. By now, we all know that a technical indicator should never be in isolation. Therefore, the ‘Pivot Points’ indicator is combined with some very powerful chart patterns and key technical levels to improve the probability of successful trades.

‘Pivot Points’ are nothing but potential support and resistance levels that will help us determine the same, even it is established. The pivot point’s parameters are usually taken from the previous day’s trading range to calculate today’s pivot points. The simplest way of plotting the pivot point indicator on the chart is by selecting the indicator from the broker’s charting software.

The main pivot point (PP) is the central pivot based on which all other pivot levels are calculated. Calculating the central pivot point is pretty simple. We just have to add yesterday’s high, low, and close and then divide that by 3, a simple average of the high, low, and close. We don’t have to worry about the calculations as the software does all that for us and gives it readymade.

The only thing we have to remember is that if the price is trading above the central pivot point, it signals a bullish trend. If the price is below the central line, it is considered a bearish trend.

Time Frame

The strategy works well on small time frames such as 15 minutes, 3 minutes, and 1 minute. It would not be wrong to classify the above strategy as a ‘Scalping Strategy.’

Indicators

We use just one technical indicator for the strategy and, i.e., ‘Pivot Points.’ We could also use the Simple Moving Average (SMA) to get a clear idea about the market trend.

Currency Pairs

The strategy is only applicable to major currency pairs of the forex market. EUR/USD, USD/JPY, GBP/USD, GBP/JPY, AUD/USD, EUR/GBP, and NZD/USD are preferred currency pairs.

Strategy Concept

The ‘Pivot Point’ strategy is based on the concept that when price respects any of the support and resistance levels of the ‘Pivot Point’ indicator, they tend to become ‘true’ S/R levels that can be relied upon. When price re-tests these ‘true’ support and resistance levels, it moves in the direction as anticipated. The above logic works greatly in favor of traders and thus increases the probability of making a profit. However, there are some rules we need to follow to execute the above strategy successfully. Let’s discuss these rules in detail.

Trade Setup

To explain the strategy, we will be executing a ‘long’ trade in EUR/USD currency pair using the strategy’s rules. Here are the steps to execute the strategy.

Step 1: Firstly, we have to plot the pivot point indicator on the chart with its default settings. As this is mostly an intraday strategy, we start each day as fresh using the partitions made by the pivot point indicator. The below image exactly shows how the beginning of a new day would look like on the pivot points.

Step 2: Next, we need to wait for the price to touch any support and resistance levels as plotted on the chart by the pivot point indicator. Not all touches are going to be important to us. Only the price touches that cause major price movement in the market will be considered as significant. For instance, if the price touches R1, R2, R3, R4, or R5 and goes down to the central line (PP), this shall be considered ‘true’ resistance. Likewise, if the price touches S1, S2, S3, S4, and S5 and goes back up to the central line, this shall be considered ‘true’ support.

The below image shows how price touches S1 and travels close to the central line. Hence, this can be considered as ‘true’ support. The further price travels, the stronger is going to be the ‘support.’

Step 3: After establishing ‘true’ support and resistance levels, we wait for the price to return to this level and show a suitable price action pattern before we can actually enter into a trade. Once the price touches established ‘support’ or ‘resistance,’ we need to watch for the formation of the ‘Rail-Road Track’ candlestick pattern on the chart. The ‘Rail-Road Track’ is essential because it confirms the respective level. We still don’t enter for a trade. The next step explains the rule of ‘entry.’

Step 4: To be sure that the support or resistance is holding, we enter only after the price starts moving in the direction we expect to move. For example, in the case of ‘true’ support, we enter ‘long’ when the price moves a further higher from the ‘support.’ Similarly, in the case of ‘true’ resistance, we enter ‘short’ when the price moves further lower from the ‘resistance.’

Step 5: In this step, we define the take-profit and stop-loss levels for the trade. The stop-loss is placed below the ‘support’ from where the price had bounced off, in case of a ‘long’ position. On the other hand, it is placed above the ‘resistance’ from where the price had collapsed. The ‘take-profit’ is set at the opposing ‘support’ and ‘resistance’ level as indicated by the pivot point indicator.

Strategy Roundup

The pivot point strategy is like a complementary tool to the traditional S/R strategy that can be used to improve the results. Since we are dealing with really small time frames, the probability of ‘successful trades’ can be ‘low.’ However, that shouldn’t be a concern for us as the risk to reward (RR) of trades executed using the above strategy is above average. This will ultimately put us in a profitable position.

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Forex Basic Strategies Forex Daily Topic

Trading The Forex Market Like A Pro Using The Williams %R Indicator

Introduction

Introduction

Introduction

In the forex market, the Relative Strength Index (RSI) is the most sought after technical indicator for measuring overbought and oversold conditions in the market. However, there are times when RSI can give misleading signals. To overcome some of these limitations of RSI, we use William’s %R (Williams Percentage Range) to help us identify when an asset is oversold or overbought.

Having determined that the asset has moved too much in one direction, we can position ourselves on the other side of the market after suitable confirmation. In today’s article, let’s discuss a strategy based on William’s %R indicator to identify when the market has become overbought or oversold. Let us first get into the specifications of the strategy.

Time Frame

The strategy works well on higher time frames such as ‘Weekly’ and ‘Daily.’ Therefore, the strategy is suitable for swing and long-term traders.

Indicators

We use the following indicators in the strategy:

  • William’s %R
  • Simple Moving Average (standard setting)

Currency Pairs

The strategy applies to all currency pairs listed on the broker’s platform, including major, minor, and exotic pairs. This is one of the distinguishing features of the strategy.

Strategy Concept

The William’s %R indicator usually ranges between 0 to -100, where a reading of 0 to -20 tells us that the asset is overbought. On the other hand, if %R falls in the range of -80 and -100, the asset is said to be oversold. As with other technical indicators, %R generates accurate trading signals when used in conjunction with other analytical tools such as chart patterns and systems.

Just because an asset may appear overbought and oversold based on the %R, this doesn’t necessarily mean that the price will reverse. Hence, we include a few concepts of the chart pattern and price action to confirm that the reversal is real. The more we wait, the higher the confirmation. But this reduces the risk-to-reward (RR) ratio moderately. This depends more on the type of trader if he is more conservative or aggressive.

In the strategy, we firstly establish a trend that is mostly in the overbought or oversold situation. This means William’s %R should indicate an overbought situation of the market for a major part of the trend during an uptrend. On the other hand, in a downtrend, William’s %R should indicate an oversold market situation for a major part of the trend. When the trend remains in the overbought or oversold condition for most of the time, the reversal tends to be sharp in nature.

This is why the above condition is important for the strategy. Next, we wait for the ‘Bullish Engulfing’ pattern to appear on the price chart, in a reversal of a downtrend. Likewise, in a reversal of an uptrend, we wait for the ‘Bearish Engulfing’ pattern to appear on the chart. This is the first sign of reversal. The reversal is confirmed when the price starts moving above the moving average, in a downtrend, and below the moving average, in an uptrend.

Stop-loss for the trade will be placed below the ‘engulfing’ pattern in a ‘long’ position and above the ‘engulfing’ pattern in a ‘short’ position.

Trade Setup

In order to explain the strategy, we will be executing a ‘long’ trade in EUR/USD currency pair using the below-mentioned rules. Here are the steps to execute the strategy.

Step 1: The first step of the strategy is to identify the major trend of the trend. An easy to determine trend is if the price is below the simple moving average, the market is in a downtrend, and if the price is above the simple moving average, the market is in an uptrend. Here we need to make sure that William’s %R indicates an overbought/oversold market situation for the major part of the trend.

The below image shows an example of a downtrend that is oversold.

Step 2: The next step is to wait for the market to present the ‘Engulfing’ pattern on the chart. In a downtrend, the ‘Bullish Engulfing’ pattern indicates a reversal of the trend, while in an uptrend, the ‘Bearish Engulfing’ pattern indicates a reversal of the trend. If the second of the engulfing pattern closes above the MA in a reversal of the downtrend, the reversal will be more prominent. Similarly, if the second candle closes below the MA in a reversal of the uptrend, the reversal can be resilient.

Step 3: The rule of entering the trade is fairly simple. We enter ‘long’ when the price starts moving further above the moving average after the occurrence of an ‘engulfing’ pattern. Similarly, we enter ‘short’ when the price starts moving further below the moving average after the occurrence of the ‘engulfing’ pattern.

Step 4: Lastly, we need to determine the stop-loss and take-profit for the trade. In a ‘long’ position, stop-loss is placed below the ‘Bullish Engulfing’ pattern. In a ‘short’ position, it is placed above the ‘Bearish Engulfing’ pattern. The take-profit is set at a point where the resultant risk-to-reward (RR) ratio of the trade will be 1.5. However, partial profits can be taken at the opposing ‘support’ and ‘resistance’ levels that might be a hurdle for the price.

In our example, the risk-to-reward (RR) ratio of 1.5 was achieved after a period of one month since traded on the ‘Daily’ time frame.

Strategy Roundup

William’s %R is a very powerful indicator that helps us identify opportunities during a reversal phase of the market. It is important to note that %R should never be used in isolation. Combining the %R indicator with chart pattern, price action, and market trend gives us an edge in the market, which is difficult to get when applied individually. Trade executed using the above strategy can longer than expected to give desirable results since it is based on a higher time frame.

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Forex Basic Strategies

Reliable ‘ADX’ Trading Strategy To Trade Forex Major Currency Pairs

Introduction 

Introduction 

Introduction 

We have talked a lot about trading strategies involving MACD, RSI, Volume and Stochastic. However, we haven’t covered much about the ADX indicator and its application. Today’s strategy is based on the ADX, which will help us in measuring the strength of a trend on any given time frame. The Average Directional Index (ADX) is a tool that is designed to measure the strength of a trend. When ADX is used in combination with other trading strategies, we get a complete understanding of the market trend and its efficacy.

Learning how to use the ADX is very easy. It ranges from a scale 0-100, 100 indicating a strong trend and 0 indicating a non-existent trend. If the ADX is close to 0, we can expect a sideways action in the market, meaning the market will neither go up or down but stay around the same value for some time. Remember, ADX will tell us about the strength of the trend. It does not guide us in the future direction of the market. For that reason, it is necessary to use concepts of market trend, retracement, and other technical indicators. ADX values of 50 and above are considered high, while ADX values of 20 and below are considered low. Weak trends are indicated by values of 20 and below.

Time Frame

The strategy works well on most time frames, including 15 minutes, 1 hour, 4 hours and Daily. However, we do not recommend applying the strategy on very low time frames due to market noise and liquidity issues.

Indicators

We use the Average Directional Index (ADX) and Simple Moving Average (SMA) indicators in the strategy.

Currency Pairs

The strategy is applicable on most currency pairs listed on the broker’s platform. However, it is advised to apply the strategy on major currency pairs only.

Strategy Concept

The ADX indicator ensures that we only trade when there is a strong trend in the market, regardless of the time frame. Here, even before looking at the candlesticks, we wait for the ADX indicator to show a reading above 60. A reading above 60 signals a strong trend and the likelihood of a trend continuation. We all know that the trend is our friend, but without gauging the strength of the trend, it can be dangerous to be a part of that trend. This is why we use the ADX indicator for trend trading.

The ADX is only limited to understanding the strength of the trend. However, in order to trade a ‘trend’, we also need to look at price action and trend continuation pattern in the market. Therefore, we use the concept of retracement and moving average to time our ‘entries.’ As this a trend trading strategy, we cannot use the rules for catching a reversal in the market.

We determine the take-profit and stop-loss levels based on ‘highs’ and ‘lows’ of the trend and retracement. Let us, straight dive, into the rules of the strategy.

Trade Setup

In order to explain the strategy, we will be executing a ‘long’ trade in USD/CAD currency pair using the rules of the strategy. Here are the steps to execute the strategy.

Step 1: Firstly, we have to plot the ADX and moving average indicators on the chart with their default setting. Before we actually look at the price action of the market, we have to watch the ADX indicator and its indication. Once the ADX crosses above 60, we look at the trend market and wait for an appropriate retracement.

Step 2: After gauging the strength of the trend using the ADX indicator, we need to wait for a suitable price retracement. The retracement, in other words, indicates a halt of the major trend of the market. In an uptrend, if price falls below the moving average and stays there, we say that the market has entered into retracement mode.

In a downtrend, if price rises above the moving average and stays there, we say that the market has entered into retracement mode. At this point, we are not sure if this is a retracement of the trend or is a start of the reversal. In order to confirm that it is a retracement, we again use the ADX indicator and check its reading. An ADX reading below 20 indicates that the ‘halt’ is actually a retracement of the major trend and not reversal.

Step 3: Now that we have got a confirmation from the ADX indicator that the market has gone into retracement mode, we should know how to enter the market. We go ‘long’ in the market when price crosses above the moving average and stays there for at least 4 or 5 candles. Similarly, we go ‘short’ in the market when price crosses below the moving average and stays there for at least 4 or 5 candles. As we just saw, the rule for entering a trade in this strategy is pretty simple and not complex at all.

Step 4: The last step of the strategy is to determine stop-loss and take-profit levels for the trade. We set take-profit near the ‘higher high’ of the uptrend while ‘long’ in the market and near the last ‘lower low’ of the downtrend while ‘short’ in the market. Stop-loss is placed below the previous ‘low’ of the retracement in an uptrend and above the ‘high’ of the retracement in a downtrend.

Strategy Roundup

The new ADX strategy gives very useful information which most of the times we never pay attention to. There are not many indicators which truly tell about the strength of the trend. ADX is one such indicator which tells if the trend is moving in strong fashion or not. At the same time, it is important to consider the strength of the pullback using price action and ADX indicator. Best profits come from catching strong trends, and this strategy helps us in accomplishing that.

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Forex Basic Strategies

Filtering The Most Profitable Trading Signals Using The ‘Zig-Zag’ Forex Trading Strategy

Introduction

Introduction

Introduction

In today’s article, we discuss a strategy that is based on the unfamous zig-zag indicator. The zig-zag indicator serves to shows changes and continuation in trends that occur in price movements. Usually, this indicator is used by traders to look for reversal points in the market. But in today’s strategy, we will use the zig-zag indicator to trade the continuation of a trend. However, if we think a little deep, this type of trading is also a form of ‘reversal trading’ where we will be finding the reversal points in a smaller trend within the larger trend.

At first glance, the indicator appears very simple but is not easy to understand by novice traders. The trading strategy that uses this indicator is not special because it uses this indicator, but since we are imparting various other concepts of technical analysis such as chart patterns, trend lines, and price action. But using this indicator alone too can generate good trading signals provided the trader is having good skill of this indicator properly.

Time Frame

The ‘zig-zag’ strategy can only be applied to the ‘Daily’ time frame. Hence, this strategy is not for intraday and short-term traders. We need to have a longer time horizon to trade using this strategy.

Indicators

We use two technical indicators in this strategy

  • Simple Moving Average (20-period)
  • Zig-Zag (default setting)

Currency Pairs

We can apply the following strategy on both minor and major currency pairs. Liquidity and volatility will not be a major issue here as we are trading on higher time frames.

Strategy Concept

We are basically using the zig-zag indicator to identify classic chart patterns of technical analysis and trade them. The indicator is very effective in reducing the noise by helping the technical trader in viewing the larger picture and general market direction. Here, we look for appropriate chart patterns and associated price action indications within the context of a trend.

When these patterns are formed just anywhere on the chart, they do not hold much value as there is no logic to that. Once we identify a trend using the simple moving average (SMA), we wait for trend continuation signs provided to us by the zig-zag indicator and the chart pattern. The formation of the chart pattern is the first sign of trend continuation. Once price action develops and the market moves in the direction of the major trend, we look for ‘entry’ signals and then only enter into a trade.

One of the astounding features of this strategy is it’s risk-to-reward (RR) ratio. Trades executed this strategy have high risk-to-reward (RR) because we are trading with the major trend and the need for a smaller stop-loss. Not only is ‘RR’ of trades high, but also the probability of winning is much higher in this strategy due to stricter rules and time given for a trade setup to be formed. Now that we got a gist of the strategy, let us find out the actions required to execute the strategy.

Trade Setup

In order to execute the strategy, we have considered the ‘Daily’ chart of the USD/JPY currency pair, where we will be illustrating a ‘short’ trade. Here are the steps to execute the strategy.

Step 1: Firstly, we have to identify the trend of the market on the ‘Daily’ chart. This can easily be done with the help of the simple moving average (SMA) indicator. If the price stays below the SMA for a long period of time, we say that the market is in a downtrend. And if it remains above the SMA for a sufficient period of time, we say that the market is in an uptrend. It is worthwhile to note that zig-zag is not being used for establishing the trend.

The below image shows that the market is in a strong downtrend in the case of USD/JPY.

Step 2: After identifying the trend of the market, we wait for the market to form a ‘head and shoulders’ pattern in a down-trending market and an ‘inverse head and shoulders’ pattern in an up-trending market. Here’s where the application of the zig-zag indicator comes into the picture. The chart pattern should essentially be indicated by the zig-zag pattern—the lines of indicator show the ‘real’ formation of the pattern in the market. In addition to this, we plot a trendline that connects the ‘lows’ (head and shoulders) or ‘highs’ (inverse head and shoulders) of the pattern as indicated by the indicator. This completes the execution of 80% of the strategy’s rules.

Step 3: We enter the market for a ‘buy’ or ‘sell’ after the price breaks the trendline and ‘tests’ it on the other side. In simple words, in a ‘head and shoulders’ pattern, we enter for a ‘sell’ when price breaks the ‘support’ trendline and re-tests after making a ‘lower low.’ While in an ‘inverse head and shoulders pattern,’ we enter for a ‘buy’ when price breaks the ‘resistance’ trendline and re-tests after making a ‘higher high.’

The below image shows how a ‘short’ entry is taken.

Step 4: Now, let us determine the stop-loss and take-profit levels for the strategy. When ‘short,’ we place a stop-loss above the right shoulder of the ‘head-and-shoulder’ pattern. Similarly, when ‘long, stop-loss is placed below the right shoulder of the ‘inverse head-and-shoulder’ pattern. Take-profit will be set at the ‘lower low ‘of the major downtrend and at the ‘higher high’ of the major uptrend. The risk-to-reward (RR) of trades executed using this strategy will be at least 1:1.5.

The below image shows the result of sample trade executed using the zig-zag strategy.

Strategy Roundup

Even though the above strategy takes a lot of time to present a potential trade, the risk-to-reward and probability of winning of these trades are worth waiting for. There are many applications of the zig-zag indicators. Traders make use of other technical indicators like the Stochastic Oscillator and Relative Strength Index (RSI) together with the zig-zag indicator to locate the overbought and oversold conditions of the market.

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Forex Basic Strategies

An Exclusive Strategy To Trade The Fiber (EUR/USD) Currency Pair

Introduction 

Introduction 

Introduction 

In the previous article, we discussed a trading strategy that was a combination of EMA and RSI. Presuming that all the readers easily understood it, we will now discuss a trading strategy that is a combination of three technical indicators. Today’s article will acquit us with another useful and reliable trading system that is based on the combination of Simple Moving Average, Stochastic Oscillator, and Relative Strength Index (RSI).

Time Frame

This strategy is only applicable on the 1-hour time frame. This is because all the indicators tend to sync in this time frame. Therefore, the strategy may not be suitable for day traders.

Indicators

The strategy consists of three indicators – a 150-period Simple Moving Average (SMA), Relative Strength Index (RSI) with period 3, and a Full Stochastic Oscillator with standard settings. The overbought and oversold levels for the indicators stand at 70-80 and 30-20, respectively.

Currency Pairs

As the name suggests, this strategy is exclusively meant for ‘EUR/USD.’ The liquidity and volatility of EUR/USD are extremely supportive of this strategy.

Strategy Concept

We first identify the direction of the market using the 150-period SMA and then establish a channel in the same direction. This is the first condition that has to be met before we can initiate a ‘trade.’ One could also this is a ‘channel’ based strategy as it involves going ‘long’ at the bottom of the channel and ‘short’ at the top once the indicators generate signals.

For a ‘long’ entry, we need to see if the Relative Strength Index drops in the oversold area. Once it drops, we look for a bullish crossover of the Stochastic lines, while they are also within their oversold zone. In simple words, we need a channel in a bull trend with both the indicators indicating that the market is oversold and with the Stochastic displaying a bull reversal.

Conversely, a ‘short’ trade is generated when the price starts moving in a downward channel in a bearish trend. The RSI and Stochastic should be in the overbought area that will later display a bearish reversal. As soon as the Stochastic fast and slow lines make a bearish crossover, we enter for a ‘sell’ on the next price bar. All of the above price action must happen below the 150-period SMA.

The strategy offers a high degree of capital protection as we place our stop-loss at the most recent ‘swing low’ or ‘swing high.’ As far as the ‘take-profit’ is concerned, we can use a fixed profit target, or we could scale out as the market approaches our target and protecting it with a trailing stop. An exit signal is also generated by the Stochastic indicator, which we will be discussing in the upcoming section of the article.

Trade Setup                     

In order to explain the strategy, we have considered the 1-hour chart of EUR/USD, where we will be applying the rules of the strategy to execute a ‘long’ trade.

Step 1: First of all, open the 1-hour chart of EUR/USD and establish the trend of the market. Plot Simple Moving Average (SMA) with a period of 150, Stochastic and Relative Strength Index with their default settings on the chart. If the price is above the 150-period SMA, we say that the market is in an uptrend. Whereas if the price is below the 150-period SMA, we say that it is in a downtrend. Next, draw a channel within the trend. It is better to have an upward channel in an uptrend and a downward channel in a downtrend.

Step 2: This is the crucial step of the strategy, where we align the three indicators together to generate a signal. After the identification of the trend and channel, we need to wait for the price to come at the extreme of the channel. In an upward channel, the price should be at the bottom of the channel, while in a downward channel, the price should be at the top.

Once the price reaches these extremes, we should watch the Stochastic and RSI. We enter ‘long’ when we notice a bullish crossover in Stochastic and an oversold circumstance of RSI (below 40). This means that the price might be putting up a ‘low’ that will result in a reversal. Similarly, we will go ‘short’ in the currency pair when we notice a bearish crossover in Stochastic along with an overbought condition of RSI (above 60).

The below image shows an example where the above step is being accomplished.

Step 3: In this step, we shall determine the Stop-Loss and Take-Profit for the trade where both these levels are derived mechanically. We place the stop-loss just below the ‘swing low’ from where the reversal took place. It will be above the recent ‘swing high’ in a ‘short’ trade. When speaking of the take-profit level, there is no fixed point for it. We take our profits when Stochastic reaches the opposite overbought/oversold level. At this point, we can either exit the trade, scale-out, or use a trailing stop. This can help in increasing the risk-to-reward (RR).

In our case, the risk-to-reward (RR) ratio of the trade was 1.5, which is above average.

Strategy Roundup

The RSI+Stochastic+SMA strategy is a reliable trend trading system that accurately pinpoints the bottom of a channel in a trend. More importantly, the strategy can provide the best-with-trend entry points that are necessary to increase the probability of winning. Since we are applying this strategy on a higher time frame, it will limit the effects of whipsaws that are encountered more often these days.

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Forex Basic Strategies

Learning To Trade The ‘Turn To Trend’ Forex Strategy

Introduction

Introduction

Introduction

Although many times before, we have stressed on trading with the direction of the market, yet most traders have a hard time trading with the trend. The observation is contrary to what is said by experts and professional traders since the majority of retail traders claim to be trading with the trend but end up trading counter-trend. While everyone talks of the idiom, “the trend is your friend,” in reality, most traders love to pick tops and bottoms and constantly violate the above rule.

Time Frame

The strategy is fixed to two-time frames. The daily time frame for trend identification and the 1-hour time frame for trade entry.

Indicators

We use the following technical indicators for the strategy:

  • 20-period SMA
  • Three standard deviations Bollinger band (3SD)
  • Two standard deviations Bollinger band (3SD)

Currency Pairs

This strategy is applicable to most of the currency pairs listed on the broker’s platform. However, exotic pairs should be avoided.

Strategy Concept

This setup recognizes the desire of most traders to buy low and sell high but does so in the predominant framework of trading with the trend. The strategy uses multiple time frames and a couple of indicators as it’s a tool for entry. First and foremost, we look at the daily chart to ascertain of the pair in a trend. For that, we use the 20-period simple moving average (SMA), which tells us the direction of the market. In technical analysis, there are numerous ways of determining the trend, but none of them is as simple and easy as the 20-period SMA.

Next, we switch to the hourly charts to find our ‘entry.’ In the ‘Turn to Trend’ Strategy, we will only trade in the direction of the market by buying highly oversold prices in an uptrend and selling highly overbought prices in a downtrend. The question arises, how do we know the market is overbought or oversold? The answer is by using Bollinger bands, which help us gauge the price action.

Bollinger bands measure price extremes by calculating the standard deviation of price from its moving average. In our case, we use the three standard deviation Bollinger band (3SD) and Bollinger band with two standard deviations (2SD). These two create a set of Bollinger band channels. When price trades in a trend, most of the price action will be contained within the Bollinger bands of 2SD and 1SD.

Trade Setup

In order to illustrate the strategy, we have considered the chart of EUR/CAD, where we will be applying the strategy to take a ‘long’ trade.

Step 1

The first step is to identify the major trend of the market. This can be done using the 20-period simple moving average (SMA). If the price is very well above the SMA, we say that the market is in an uptrend. Likewise, if the price is mostly below the SMA, we say that the market is a downtrend. For this strategy, we have to determine the trend on the daily chart of the currency pair.

In our case, we see that the market is in a strong uptrend, as shown in the below image. Hence, we will enter for a ‘long’ trade at the price retracement on the 1-hour time frame.

Step 2

Next, we have to change the time frame of the chart to 1 hour and wait for a price retracement. In order to evaluate the retracement, we plot three standard deviations (3SD) and two standard deviations (2SD) Bollinger band on the chart. After plotting the two Bollinger bands, we need to wait for the price to get into the zone of 2SD-3SD BB.

In the below image, we can see that the price breaks into the zone of 2SD-3SD BB after a lengthy ‘range’ movement.

Step 3

Once the price moves into the zone of 2SD-3SD BB, we wait for the price to bounce off from the lower band of the 3SD BB to give an indication of a reversal. In a ‘short‘ set up, the price should react off from the upper band of the 3SD BB, and give an indication of downtrend continuation. During this process, we need to make sure that the price does not break below or above the 3SD BB. Because if this happens, the ‘pullback’ is no more valid, and this could be a sign of reversal. This is a crucial aspect of the strategy.

The below image shows how the price bounces off from the lower band of the 3SD BB two candles after the price moves into the zone.

Step 4

We enter the market at the first sign of trend continuation, which was determined in the previous step. Now we need to define the stop-loss and take-profit for the strategy. Stop-loss should be placed below the lower band of the 3SD BB, in case of a ‘long’ trade and above the upper band of the 3SD BB, in a ‘short’ trade. The ‘take-profit’ is not a fixed point. Instead, we take our profit as soon as the price touches the opposite band of the 3SD BB.

In the case of EUR/CAD, the resultant risk-to-reward of the trade was a minimum of 1:2, as shown in the below image.

Strategy Roundup

The beauty of this setup is that it prevents us from guessing the turn in the market prematurely by forcing us to wait until the price action confirms a swing bottom or a swing top. If the price is in a downtrend, we watch the hourlies for a turn back to the trend. If the price continues to trade between the 3SD and 2SD BB, we stay away as long as we get confirmation from the market. We can also set our first take-profit at 1:1 risk to reward to lock in some profits.

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Forex Basic Strategies

You Must Know This ‘7-Day Period’ Forex Trading Strategy!

Introduction

Introduction

Introduction

Trying to pick the top or bottom is one of the favorite things a trader likes to do. We tried to do that using the ‘Dolphin Strategy.’ We did that with no indicator support. We are again going to unveil a strategy that does pick a top or bottom with no indicator support. This strategy is called the 7-Day period strategy. Let us take a step back and think, indicators are nothing but a mathematical representation of prices, which are calculated in different ways.

Therefore, sometimes it is important to look at prices alone. The 7-day period strategy is based on the idea that after every seven days of consecutive strength, a currency pair’s move is due for a retracement. The question arises, why seven days? This number is derived after constantly watching the market for years. Often, a new trend emerges at the beginning of the week, and if the trend is strong, it can last for several days with no retracement.

Many psychologists believe that human beings have the best retention rates on numbers that are in groups of seven or less. This is one of the reasons why phone numbers in the U.S. only have seven digits, aside from the area code. We have seen that the seven-day reversal pattern is more accurate in a trending market. We gave occasionally seen those periods when the market continues to move in the same direction after seven days of the exhaustive movement, i.e., from the 8th day onwards. Even though the setup is rare, when it does occur, it is significant.

Time Frame

As the name of the strategy suggests, it can be traded only in the daily time frame.

Indicators

In this strategy, no indicators are used. Simple Moving Average (SMA) can put on the chart to get a clear idea of the trend.

Currency Pairs

This strategy can be applied to all the currencies in the forex market. Exotic pairs should be avoided.

Strategy Concept 

The basic idea of the strategy is that when the market is strongly trending on the hourly chart, the retracement does not last more than seven days and changes its direction at the sixth or seventh day. This retracement is considered to over-extended, which leads to a strong reversal in the pair.

If the sixth or seventh candle coincides with a key technical level, the ‘move’ may very well stall at that level and continue its major trend. To implement the strategy effectively, we need to know trends and trend retracement. Since this strategy is based on fixed rules and price action, it is not necessary to know about technical indicators. However, SMA and ATR can be used for trend identification and measuring the momentum of the market.

Trade Setup

In order to understand how the strategy works, we will apply it on the USD/CAD currency pair and execute a ‘short’ trade using the strategy.

Step 1

The first step is to identify the direction of the market. As this is a trend trading strategy, we should be able to identify the major direction of the market. If the market is making higher highs and higher lows, it is an uptrend, or if the market is making lower lows and lower highs, it is a downtrend. A trend can also be determined using the Simple Moving Average (SMA) indicator. Very simply, if the price is below SMA, we say that the market is in a downtrend, and if the price is above the SMA, the market is said to be in an uptrend.

In the example we have considered, from the below image, it is clear that the market is in a strong downtrend.

Step 2

Next, wait for a retracement from the highest or the lowest point, which we will be evaluated based on our strategy rules. The retracement should be such that there are seven consecutive candles of the same color. One or two candles of the opposite color are okay, but we need to make sure that it does not impact the structure of the retracement. These seven candles represent an extended pullback, which can lead to reversal any moment.

In the below image, we can see seven days of the up movement, which is exactly the kind of retracement which we need for the strategy.

Step 3

In this step, we need to check the position of the price after seven straight days of the movement. The strategy works best if the price coincides with a key technical level of support and resistance. This is because, in these areas, the price action is very strong, and market moves as per expectations. But it is important to make sure that no step of the strategy is used individually. All of them need to be used collectively.

We enter the market once we get confirmation after the 7-day period. The confirmation is nothing but a bullish candle in case of a ‘long’ setup and a bearish candle in case of a ‘short’ setup.

In our example, we see that the price has approached the previous ‘lower high’ of the downtrend. This is an area where we can expect sellers to get active and take the price lower.

Step 4

Finally, we need to determine the ‘stop-loss’ and ‘take-profit‘ for the strategy. We place the stop-loss a little higher than the bullish candle when entering for a ‘long’ and little lower the bearish candle if entering for a ‘short.’ We take profit at two places in this strategy. The first take-profit is set at the previous higher high or lower low, while the second take-profit is set at 1:2 risk to reward.

Strategy Roundup

As there are many conditions associated with the strategy, the setup might be rare, but when it does occur, it is significant. We have seen trends where the retracement occurs for just a few days before it starts moving in the direction of the major trend. But these setups are not reliable. The most important condition of this setup is the continuous appearance of bullish or bearish candles for seven days.

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Forex Assets

Trading Costs Involved While Trading The ‘CHF/SEK’ Forex Exotic Pair

Introduction

Introduction

Introduction

The acronym of CHF/SEK is Swiss Franc, paired with the Swedish Krona. In this exotic Forex pair, CHF is the official currency of Switzerland and is also the fifth highly traded currency in the Forex market. In contrast, SEK stands for the Swedish Krona, and it is the official currency of Sweden.

Understanding CHF/SEK

In the Forex market, to ascertain the relative value of one currency, we need an alternate currency to assess. The market value of CHF/SEK helps us to understand the power of SEK versus the CHF. So, if the trade rate for the pair CHF/SEK is 9.8418, it means to buy 1 CHF, we need 9.8418 SEK.

CHF/SEK Specification

Spread

Spread is the variable between the ask-bit price that is set at the exchanges. Below are the spread values of the CHF/SEK currency pair in both ECN & STP accounts. The spread charges for ECN and STP brokers for CHF/SEK are given below.

ECN: 45 | STP: 50

Fees

For every place, a trader enters the broker charges some fee for it. A trader must know that this fee is applicable on ECN accounts only and not on STP accounts.

Slippage

Slippage is the price variation between the trader’s execution and at which the broker implemented the price. The variance is due to high market volatility and slow execution speed.

Trading Range in CHF/SEK

A trading range is the interpretation of the volatility in CHF/SEK in numerous timeframes. The values are attained from the Average True Range indicator. One can use the table as a risk management tool to distinguish the profit/loss that a trader is possessed.

Below is a table explaining the minimum, average, and max volatility (pip movement) on a variety of timeframes.  

 Procedure to assess Pip Ranges

  1. Add the ATR indicator to your chart
  2. Set the period to 1
  3. Add a 200-period SMA to this indicator
  4. Shrink the chart so you can assess a large time period
  5. Select your desired timeframe
  6. Measure the floor level and set this value as the min
  7. Measure the level of the 200-period SMA and set this as the average
  8. Measure the peak levels and set this as Max.

CHF/SEK Cost as a Percent of the Trading Range

The entire cost of the trade varies based on the volatility of the market. So, we must find out the instances when the costs are less to place ourselves in the market. Below is a table explaining variation in the costs based on the change in the market volatility.

Note: The percentage costs represent the comparative scale of costs and not the fixed costs on the trade.

ECN Model Account

Spread = 45 | Slippage = 5 | Trading fee = 8

Total cost = Slippage + Spread + Trading Fee = 5 + 45 + 8= 58

STP Model Account

Spread = 50 | Slippage = 5 | Trading fee = 0

Total cost = Slippage + Spread + Trading Fee = 5 + 50 + 0 = 55

The Ideal way to trade the CHF/SEK

The two components a trader should consider while trading any security in the markets are – Volatility & Cost. With the help of the above tables, let us evaluate these two factors to trade the CHF/SEK ideally.

We can see that the pip difference is substantially high among the minimum volatility and the average volatility in every timeframe. For a day trader, the objective is to make revenue from the pip movement of the market. But, if there is barely any pip movement in the price, it becomes difficult to make profits out of the market. Therefore, it is perfect to trade when the volatility is at the average value.

The cost increases as the volatility decline, and they are inversely proportional to each other. In other words, highly volatile markets have the lowest costs. However, it is relatively risky to trade markets with higher volatility though the costs are low. Therefore, to maintain stability among the cost and volatility, traders may discover instances when the volatility is close to the average values or a little above it.

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Forex Basic Strategies

Trading The Rapid Fire Strategy – A Reliable Scalping Technique

Introduction

Introduction

Introduction

In recent times, the scalping style of trading has gained a lot of attraction from all types of traders. These strategies are characterized by high-volume trading, which is designed to enter the market frequently to make just a few pips.

Most scalping strategies are built using indicators that can make it extremely tough for beginners who are new to the markets. This is one of the reasons why scalping is not recommended for new traders. Whichever scalping strategy we use, we need to make sure that the broker’s platform allows us to employ the strategy on the lowest time frames.

The two scalping techniques we will be discussing are – Rapid-fire and Piranha. These strategies are developed on the 1 minute and 5 minutes time frame charts, respectively. These two time-frames provide ample opportunities to enter in and out of the market several times a day.

Although scalping can be exciting, it can lead to fatigue and loss of concentration due to constant monitoring of the markets. Therefore, besides just knowing about the strategy, one should meditate and learn to be away from the markets when not required. Overtrading does not profit all the time.

The rapid-fire strategy has two basic requirements:

Highly liquid currency pair | Lower timeframe

This criterion led to the development of the strategy on the 1-minute time frame chart using the EUR/USD currency pair. With this strategy, one can find around 30 to 40 trading opportunities every day.

Time Frame

The rapid-fire strategy works well with the 1 minute and even 2 minutes time frame charts, where each candlestick represents one minute of price movement.

Indicators

We use two indicators for the rapid-fire strategy with the following settings.

  1. Parabolic SAR – Step size 0.02 | Maximum 0.2
  2. A simple moving average (SMA) with period 50 and apply to close.

Currency Pairs

The strategy is designed specifically for most liquid currency pairs as EUR/USD, GBP/USD, USD/JPY, and a few others. However, the EUR/USD pair is the most preferred pair for the strategy.

Strategy Concept

The rapid-fire is basically a trend trading strategy. So, we will be applying the strategy on the pullback of a major trend. The strategy combines two trend indicators, SMA 60 and Parabolic SAR, with the appropriate setting. The SMA is used to identify the major trend of the market. This means we look to buy the currency pair when the price is above the SMA, and similarly, we look to short the pair when the below the SMA.

The Parabolic SAR is used to give the exact entry signal after identifying the market direction and pattern. Once we identify the direction, when the price moves above or below the parabolic SAR, we take a trade based on the current position of the price. Let us understand this in detail.

Trade Setup

In order to explain the step by step procedure of the strategy, we have considered the EUR/USD currency pair where we will be applying the strategy on the 1-minute time frame chart. It is advised not to switch to a time frame any lower than 1 minute as it is very hectic.

Step 1

Since it is a trend trading strategy, the first step is to identify the major trend of the market and wait for a retracement. If the retracement comes close to the SMA, it is the ideal case of a pullback. The longer the price remains above or below the SMA, the stronger is the trend.

In our example, we see the market is in an uptrend, as shown in the below image, where the price is well above the SMA for a long time.

Step 2

We can see that there are two dotted lines of the parabolic SAR, an upper one, and another is the lower. The next and most crucial step of the strategy is looking for the entry signal. In case of an uptrend, when the price retracement comes in from the highest point, the price is below the parabolic SAR, which means the price is still in its retracement frame. When the price goes above the upper dotted line of the parabolic SAR, it signals a continuation of the trend, and we enter right at the close of the candle above the SAR.

In the below image, we can see how the price crosses the parabolic SAR and signals an upward price movement.

Step 3

This is the final step of the strategy, where we determine our take-profit and stop-loss levels for the strategy. The stop loss is placed below the previous ‘low,’ or in some cases below the second previous low if the previous low is too close. In case of a downtrend, it is above the previous ‘high.’ As the stop loss is not too big, the risk to reward ratio is more than 1 for this strategy. The take-profit is set at 15-20 pips above or below the entry price, depending on ‘long’ or ‘short’ position.

In our case, the risk to reward of the trade was 1.5, where the market moves further above the take-profit point. Since we are trading with the trend, the trade has the potential to move much further, and thus, one can use trailing stop loss to maximize the gains.

Strategy Roundup

The rapid-fire strategy could also give another entry signal during the course of current trade. It is common to encounter consecutive trade signals one after the other, simply because of the low time frame being used. However, it requires a lot of practice before one can spot them. One should know how to manage the trades, especially when the setups come in fast and furious. The rapid-fire strategy works best in trading markets, which requires quick thinking and swift reactions.

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Forex Basic Strategies

Restrict Your Losses To Only 10-Pips a Day With This Strategy

Introduction

Introduction

Introduction

Every trader loves the idea of winning on each trade they take. After all, winning is the sole purpose of trading. Various strategies in the market promise to offer profits every day, but none of them are good enough to make you win every single trade you take. In the end, almost all of the traders wish for a method that could reap them good profit every day. But as we all know, trading is less about making money and more about saving your capital. For this same purpose, we have created the 10 Pip Loss Strategy.

The strategy suggests that we must take two to three trades a day by placing only ten pips stop-loss and go for bigger targets. For instance, let’s consider that we took three trades in a single day. If we lose two trades and end up winning one, we will be losing only 20 pips, but the gains that are earned on the third trade can be more. By following this strategy, our primary focus should be on taking three potential trades in a day.

The Strategy – Pairing Double Moving Average & Stochastic Indicator

It is highly advisable to use this strategy in a strong trending market.

To Go Long (Buy Trades)

  • Firstly, identify an uptrend in any currency pair.
  • Apply the double moving average indicator to the price chart. Go with 9 and 14 periods.
  • Wait for the pullback to happen, and the price action must hold below the double moving average.
  • Look if the Stochastic is reversing at the oversold area.
  • Go long if all the above rules are met.
  • Place the stop-loss just ten pips below the entry. Take profit placement depends on the market state. If the buyer movement is strong, expect a brand new higher high; if the momentum is a slow, exit at the most recent higher high.

The image below represents our losing trade in the AUD/CHF forex pair. As you can see, both the indicators gave us a trading signal at around 08:45 AM. We activated our trade when the price of the asset is 0.6129. It went a bit up and suddenly dropped down to hit our stop loss. As a result, we ended up losing the trade.

The best thing is that we lost only ten pips. Hence, these smaller losses won’t influence our decision-making abilities.

The image below represents our winning trade in the AUD/NZD Forex pair. We took this trade on 22nd April at around 08:45 AM. When the moving average went below the price, the Stochastic gave a reversal at the oversold area, indicating us to go long in this pair. Right after we went long, the price action blasted to the north and printed a brand new higher high. We end up making 90 pips in this trade.

Overall, we lost ten pips till now, and hence we stand at 80 pips profit.

The below price chart represents our third trade on 22nd April. We took this trade at around 6:45 PM. Following our strategy, we made entry, and the price action has printed a brand new higher high. This trade gave us a profit of 80 pips.

To sum it up, we took three trades out of which we made 170+ pips profit and a loss of only ten pips. By following this strategy, we can make profits on every single trading day. Note: Use this strategy only when you see the potential of having at least three trades in a single day. Otherwise, there is no point in using this strategy.

To Go Short (Sell Trades)

  1. Firstly, identify a downtrend in any currency pair.
  2. Apply the double moving average indicator to the price chart. Go with 9 and 14 periods.
  3. Wait for the pullback to happen, and the price action must hold above the double moving average.
  4. Look if the Stochastic is reversing at the overbought area.
  5. Go short if all the above rules are met.
  6. Place the stop-loss just ten pips above the entry. Take profit placement depends on the market state. If the seller movement is strong, expect a brand new lower low; if the momentum is a slow, exit at the most recent lower low.

The image below represents a sell signal in the CHF/JPY Forex pair. This is the first trade we activated on 13th April at around 08:45 AM. Overall, the market was in a strong downtrend, and when it pulled back, both the indicators gave us a sell signal. After we went short, the price sharply goes down and prints a brand new lower low. This trade gave us 60+ pip profit.

We took the second trade relatively at the same time in the USD/JPY Forex pair. Overall, this pair was also in a strong downtrend, and we activated the trade when both the indicators gave us a sell signal. In this pair, the seller momentum was strong enough, and we ended up making 82+ pips. 

This is the third trade we took in the EUR/JPY Forex pair. When price action pulled back to the moving average, the Stochastic also gave us a reversal at the overbought area, indicating us to go short. By the time we have exited, we booked 64+ pips of profit.

In total, we took three trades, and all of them hit our take-profit. If you observe, even if we would have lost two trades and won only one, we would still have ended up on the winning side. In a strong trending market, it is easy to win all the trades we take. All you need to do is to follow the rules of the strategy very well. To sum it up, with minimum risk, we gained a profit of 206 pips from the market.

We hope you understood the strategy well. Please try and trade this strategy in a demo account before applying it to the live market. Cheers!

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Forex Assets

Analyzing The ‘ADA/USD’ Crypto-Fiat Asset Class

Introduction

Introduction

Introduction

Cardano is a decentralized platform allowing programmable transfers of value securely in a scalable fashion. It is the first blockchain created out from a scientific philosophy. It is also the first research-driven cryptocurrency that is built on the Haskell programming language.

Cardano is traded with the ticker ADA. It has a market capitalization of $2.2 billion. It can be bought, sold, and exchanged in several cryptocurrency exchanges. Apart from USD, it can be traded against other cryptos such as BTC, ETH, USDT, etc.

Understanding ADA/USD

The price of ADA/USD depicts the value of the US Dollar equivalent to one Cardano. It is quoted as 1 ADA per X USD. For example, if the market price of ADA/USD is 0.086112, then each ADA will be worth 0.086112 US dollars.

ADA/USD specifications

Forex brokers allow trading of only a few popular cryptocurrencies like Bitcoin, Ethereum, Ripple, etc. The other cryptos must be traded via cryptocurrency exchanges. And the working of these exchanges is different from that of forex brokers. As a major difference, cryptos are not traded in lots, in cryptocurrency exchanges.

Spread

Spread is the difference between the buying and selling price of the cryptocurrency. Crypto exchanges match these prices between induvial traders. Thus, there is no fixed spread. Also, typically, the spread is negligible in trading cryptos.

Fee

There are different fees charged by cryptocurrency exchanges for trading any coin. The various forms of fees include

  • Execution fee (Taker or Maker)
  • 30-day trading volume fee
  • Margin opening fee, if applicable

Note that the taker or maker fee will be considered for opening as well as closing the trade, and will depend on the value being traded.

Example

  • Short 10,000 ADA/USD at $0.085800
  • 30-day volume fee is $0
  • Order is executed as Taker

Total cost of the order = 10000 x $0.085800 = $858

Assuming the taker fee to be 0.26%, the opening fee will be – $858 x 0.26% = $2.23

Assuming the trade is opened with leverage, and the margin opening fee is 0.02%, the fee is calculated as – $858 x 0.02% = $0.17

If the order is closed at $0.095800, the total cost of closing will be 10,000 x $0.095800 = $958. And the fee for the same obtained is – $958 x 0.26% = $2.5

Thus, the total fee for the opening, maintaining and closing the trade would be equal to – $2.24 + $0.17 + $2.5 = $4.91

Trading Range in ADA/USD

The trading range represents the number of units moved in the pair in a specified time frame. For example, if 10,000 ADA/USD is traded and the average unit movement in the 1H time frame is 0.000778, then it means the pair will yield 10,000 x 0.000778 = $7.78.

Note: the above values are for trading 10,000 units of ADA/USD. If X units are traded, then the ATR values will be,

(Above ATR value / 10,000) x X units

Procedure to assess ATR values

  1. Add the ATR indicator to your chart.
  2. Set the period to 1
  3. Add a 200-period SMA to this indicator.
  4. Shrink the chart so you can assess a large time period
  5. Select your desired timeframe
  6. Measure the floor level and set this value as the min
  7. Measure the level of the 200-period SMA and set this as the average
  8. Measure the peak levels and set this as Max.

ADA/USD Cost as a Percent of the Trading Range

The following tables depict the variations in total cost in terms of percentage based on the change in volatility and time frame.

Taker Execution Model

Opening = $2.23 | Margin fee = $0.17 | Closing = $2.5

Total fee = Opening + Margin fee + Closing = $2.24 + $0.17 + $2.5 = $4.91

Maker Execution Model

Opening = $1.37* | Margin fee = $0.17 | Closing = $1.53*

Total fee = Opening + Margin fee + Closing = $1.37 + $0.17 + $1.53 = $3.07

*Assuming maker fee to be 0.16% the trade value.

Trading the ADA/USD

Cardano stands 10th in CoinMarketCap in terms of market capitalization. Thus, making it a tradable pair in the crypto market. Almost all forex brokers do not ADA enabled for trading, so it must be traded through cryptocurrency exchanges. The fee structure here is quite different from forex brokers. However, the overall fee is more or less the same.

Comprehending the above tables, the magnitude of the percentage depicts how expensive/cheap a trade will be relative to the time frame and profit/loss. Let us understand this with an example.

The average values in 4H and 1D are 26.65% and 9.73%, respectively. The percentage in the 4H time frame is greater than the percentage in the 1D time frame. This means that the total cost for both is the same ($4.91), but relative to the generated profit, it is higher in the 4H time frame. A detailed reason for this can be given from the trading range table.

In the trading range table, the corresponding values are $11.52 and $31.55. This can be interpreted as, an average of $11.52 will be generated in trading the 4H time frame, and $31.55 when trading the 1D time frame. The fee in both cases is the same. Thus, we infer that the fee that is paid to generate $31.55, the same fee is deducted for generating $11.52. And hence, this is exactly what the higher percentage value depicts.

Reading through the row, the percentage values for a time frame is highest in the minimum column and least in the maximum column. So, if you’re are able to deal with higher volatility, it is ideal to trade when the volatility is around the average or maximum values. And if you cannot deal with the high volatility, you may trade the higher time frames to reduce the relative costs.

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Forex Course

77. Moving Averages – Detailed Summary

Introduction

Introduction

Introduction

In the past few course articles, we have learned a lot about Moving Averages, their purpose, and various applications of this trading tool. So we just wanted to summarize everything we have discussed until now related to Moving Averages. This article will act as a quick guide for you to recall and remember the concepts better.

What Is A Moving Average?

A moving average is a tool that is used by the traders to identify the direction of the trend. It smoothens the price fluctuations by eliminating the temporary noise in the market. This will eventually help us in identifying the actual trend of the market. There are two types of moving averages, and both of them have different purposes. They are Simple Moving Average and Exponential Moving Average. There are different athematic calculations behind these averages, and we don’t have to know about them in detail. However, if you are interested in knowing, you can find the formula behind the averages here.

The length plays a significant role in the usage of a Moving Average. Lenght is nothing but the predetermined period of the moving average. Smaller MAs always reacts swiftly to the price movements where are longer MAs respond slowly to the price. For example, a 10-period MA always reacts quickly compared to a 20 or 30 period moving average.

SMA vs. EMA

Both SMA and EMA have their own applications to them. They can also be combined to produce more reliable trading signals. But those are sophisticated strategies that are used by some of the experienced traders. The basic approach is that the SMA should be used to protect yourself from the fake-outs that are produced by the market. We might miss out on the opportunity of being a part of the early trend, but we will be safe.

Contrarily, Exponential Moving Average quickly predicts the trend and help us in being a part of the early trend. However, it carries the risk of not identifying the fake-outs. Hence one must use these MAs depending on the market situations. We have also discussed the ways through which we can identify the market trend and taking trades using moving averages.

Applying the Moving Average Indicator On The Price Charts

With the advent of technology, most of the Forex charting platforms these days provide advanced MA indicators. MT4 has all of the moving average indicators by default. However, if you want to download a customized MT4 indicator, you can download it here. If you are a TradingView user, you can plot different period MAs on the price charts just by accessing the toolbar and choosing the MA indicator. You can change the period setting before plotting the MA on the charts.

Conclusion

Moving Average is one of the most basic technical tools but is sturdy. The usefulness of this indicator is increased when we use different period moving averages on the same chart. Also, this indicator can be combined with various other technical indicators to improve the reliability of our signals. If you have been following our strategy series, you would have seen us combining moving averages with other technical tools to filter out fake trading signals. That’s about the basics of moving averages and their applications. In the upcoming lessons, we will be learning about various indicators and their use cases. So stay tuned! Cheers.

Categories
Forex Course

74. Using Moving Averages To Identify The Trend

Introduction

Introduction

Introduction

In the previous lessons, we have understood the two types of Moving Averages and the difference between them. We have also seen which Moving Average should be used in different market conditions and the one that must be preferred most of the time. From this crouse lesson, let’s explore the real-time applications of Moving Averages and how we can find accurate trades using this indicator.

One of the simplest, yet important use of Moving Average is to determine the direction of the trend. This can be done by plotting the indicator on the chart and then deciding the position of candlesticks with respect to the line of Moving Average.

The ideal way of identifying a trend using MA is this – If the price action tends to stay above the moving average line, it usually signals an uptrend. Likewise, if the price action remains below the moving average line, it indicates a downtrend.

This approach of establishing the trend is too simplistic and also has a significant drawback. Let us understand that with the help of an example.

Below is the EUR/USD price chart, and we have added a 10-period MA line to it. According to the rules of MA, since the price is above the MA, we should be going ‘long’ in this currency pair.

Due to a news event, price drops suddenly and closes below the MA (in the below chart). So, this changes our plan, which means now we should be thinking of going ‘short’ in the currency pair. But before we do that, let us see what happens to the price in the next few candles.

The below image shows that the price fakes out and does not continue its downward trend. Hence, if we would have gone short, that would have resulted in the price hitting our stop-loss resulting in a loss. Let’s understand the problem with this setup.

The strategy mentioned above is right, but the problem is that we are using a single period MA line stand-alone and not combining it with any other indicator. The best way to use MA for determining a trend is by plotting an extra Moving Average line on the charts instead of just one. It will give us a clearer idea if the pair is trending up or down depending on the sequence of the MAs.

The best way is to check if the ‘faster’ moving average is above the ‘slower’ moving average for an uptrend, and vice versa for a downtrend. In the below chart, we can see that the ‘faster’ SMA is above the ‘slower’ SMA, and this shows the strength of the uptrend. Also, the fake-outs that happen because of news releases will also have less impact on the indication given by the Moving Averages. Combining this knowledge with trendlines can help us decide if we have to go ‘long’ or ‘short’ in the currency pair.

Conclusion

Moving Averages can be useful for establishing the direction of a trend, but it should never be used stand-alone. If not other indicators, additional moving averages itself can be combined with an existing moving average to decide the direction of the trend. In the next article, we will be discussing how we can enter a trade using moving averages and profit from this indicator.

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Categories
Forex Course

73. Simple vs. Exponential Moving Average

Introduction

Introduction

Introduction

After having a fair amount of discussion concerning Simple and Exponential Moving Averages, a question that may arise is, which one to use when? Whether SMA gives accurate trading signals, or is it the EMA that is more accurate and reliable than SMA? Let’s try answering these questions in this article.

We mentioned in the previous article that the EMA responds to price action more quickly. So, if we want to determine a short-term trend, EMA is the best way to go. It can undoubtedly help us in catching the early move of a trend and, in fact, profit from it by taking suitable positions in the market. The downside of the EMA is that it gives us the wrong signals during the consolidation periods of the market.

Since the EMA responds very quickly to price movements, we might think that the price has broken out of the range while it could just be a spike. The EMA proves to be too fast, and this is not desirable in such market scenarios.

In the below chart, we see that the market starts to ‘range’ after a retracement of the big downward move. Due to this, the EMA starts moving up, indicating a buy signal. Later, when the last but one candle of the range breaks out above the range, traders might think that the market has reversed, as this is also confirmed by the EMA. In the very next candle, the price makes a long wick at the top of the candle, and the EMA takes a sharp turn on the downside. This is one of the examples where the EMA can give us false signals.

The opposite is true with Simple Moving Average (SMA).

The SMA should be used when we want the moving average to be smooth and respond to price action slower than the real price movement. This characteristic is particularly useful when we are trading longer trading frames, such as daily or weekly. Since SMA responds slowly to price movement, it can possibly save us from such fake outs.

The below chart represents the weekly chart of a Forex currency pair where we can see the SMA moving up even after the occurrence of the spike. Hence the SMA gives an idea of the overall trend by filtering out spikes.

Conclusion

The SMA should be used when we want to protect ourselves from fake-outs and predict the price movement in the longer term. By using SMA, we might miss the opportunity of getting in on the trend early. On the other hand, the EMA is quick to predict the trend, and thus we can be a part of the initial move of the trend. But it carries the risk of getting preoccupied with fake-outs.

The answer to the above question (which one is better?) is that it really depends on the type of trader we are. Our risk appetite, trading time frame, and strategy will influence the type of moving average we should choose. In the upcoming lessons, we will learn how to use moving averages to determine the trend and take a trade. Stay Tuned.

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Forex Course

72. Understanding Exponential Moving Average

Introduction

Introduction

Introduction

In the previous course lesson, we understood the first type of Moving Average, which is SMA. We also saw how spikes could distort the SMA. The solution to this distortion is the Exponential Moving Average (EMA); so, let’s discuss this type of MA in our lesson today.

The EMA gives more weightage to the recent change in prices and does not give much importance to previous data. Learning how to calculate and plot EMA on the chart will provide us with a clear understanding of which Moving Average should be used at different times of the market.

We shall take an example to explain the definition of EMA. This example will also show how the EMA overcomes a significant limitation of the SMA. In the below figure, we have plotted a 10-period SMA on the daily chart of a currency pair. Here we have chosen the USD/CHF currency pair as an example.

Since we are calculating the 10 ‘period’ SMA, we need first to note down the closing prices of the last ten periods days. The prices are as follows:

0.97806,0.97986,0.97528,0.97336,0.97536,0.97461,0.97536,0.97829,0.98156,0.97636.

The next step is to add the above-given numbers together and then divide the result by 10. This equals to 9.76804 / 10 = 0.97680. Therefore, the SMA for the last 10 days is 0.97680. The end of the orange SMA line in the above chart points exactly to the price 0.97860.

Now let us consider a case where, on the sixth day, dollar drops drastically due to a news event that was bad for the US economy. If the sixth candle drops to a price around 0.97000 (closing of all other remaining the same) due to the news release, the new SMA will now be calculated as follows:

(0.97806 + 0.97986 + 0.97528 + 0.97336 + 0.97536 + 0.97000 + 0.97536 + 0.97829 + 
0.98156 + 0.97636) / 10 = 0.97654

The resultant SMA is lower than the SMA we had obtained in the previous step. This means when the price dropped on Day 6, it created a notion that the trend is going to reverse, but in reality, it was just a one-time event that was caused by news. We need a mechanism that will filter out these spikes so that we don’t get the wrong idea. This is where EMA comes to our help.

Taking the above example, EMA gives more stress on the recent price movements, such as the closing prices of the last four candles. This means the spike that happened on the sixth day will be of less value and wouldn’t have much effect on the moving average. It is always a smart and better idea to focus on what traders are doing recently rather than what happened long ago. Always remember that the past data is of less significance to us.

The below chart shows the difference between the two moving averages when they are plotted simultaneously.

Notice that the purple line (10-period EMA) appears to be closer to the candles than the orange line (10-period SMA). This means the EMA is more accurate in representing the recent price action, and now we know why. So, the bottom line is to pay attention to the last few candles rather than candles of last week or last month.

Conclusion

That’s about the two types moving averages with their own advantages. The EMA is a better option to use when you are swing trading as it gives precise analysis than SMA due to the reasons mentioned above. EMA, too cannot be used standalone and should be paired with a trading strategy. In the next article, we will discuss the pros and cons of using SMA and EMA.

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Forex Course

71. Basics Of Simple Moving Average

Introduction

Introduction

Introduction

In the previous lesson, we understood the definition of Moving Average, their importance, and the significance of ‘length’ in MAs. We also learned the correct way of choosing the ‘length’ while using Moving Averages. In the upcoming articles, we shall see and understand the different types of moving averages. Let’s start off by learning the first type – Simple Moving Average (SMA).

Simple Moving Average

The SMA is a very simple Moving Average that is calculated by the summation of the last ‘n’ period’s closing prices and then by ‘n.’

Let us understand the above formula with an example.

When we plot 10 ‘period’ SMA on a 1-hour chart, we add the closing prices of the last 10 hours, and then divide it by 10. Similarly to plot a 5 ‘period’ SMA on a 4-hour chart, we need to add the closing prices of the candles in the last 20 hours and then divide that number by 5. These calculations are coded and embedded in the form of indicators. These indicators will be available in almost all of the trading platforms. All we need to do is to pick the indicator from the tools bar and plot them on the charts by selecting the appropriate period and timeframe.

In the below chart, we have potted three different SMAs on the chart. This chart represents the 1-hour time frame of a currency pair. As we see, longer the period of SMA, more it lags behind the price. This explains the reason why the 60 ‘period’ SMA is farther away from the 30 ‘period’ SMA; because the 60-period SMA adds up the last 60 periods and divides it by 60 as mentioned above.

When the period of an SMA is large, it reacts slowly to the price movement. Essential, SMA shows the overall sentiment of the market at any given point in time. However, SMA should always be used to find the direction of the market in the near future but not take trades based on this information alone.

Instead of looking at the current price of the market, we need to have a broader view and predict the direction of the future price movement. Using SMA, we can say if the market is in an uptrend, downtrend, or if it is moving sideways.

One major drawback of SMAs is that they are vulnerable to spikes. So, during the calculations, the prices of the currency pair, which is of no significance (high or low of spike), will be added up and shown by the SMA line. The reason behind less significance to the prices of spikes is because they give false signals, and we might think a new trend is developing, but in reality, it is just a failure of the price.

The below figure shows how the SMA would be when there are too many spikes in the chart. As we can see, the 10 ‘period’ SMA is not uniform and is not able to show the direction of the market in the occurrence of spikes.

Conclusion

The SMA should be plotted to know the market trend when it is not clear. It can also be used to forecast the price movement in the near future. It is very important to combine this indicator with a trading strategy as it can never produce the results when used standalone. In the next lesson, we shall introduce another type of moving average and see how it can solve the issues we face with SMA.

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Forex Course

70 – Introduction To Moving Averages

Introduction

Introduction

Introduction

After understanding various applications of the Fibonacci indicator, it’s time to learn about the next best indicator in technical analysis – Moving Average. MA is one of the most popular indicators in the technical trading community. This indicator, just like the Fibonacci Indicator, has a lot of applications and is commonly used by traders for different reasons.

A moving average smoothens the price movements and its fluctuations by eliminating the ‘noise’ in the market. By doing this, MAs shows us the actual underlying trend. A moving average is computed by taking the average closing price of a currency for the last ‘X’ number of candles. There are many moving averages depending on the number of periods (candles) considered.

Below is how a 5-Period Moving Average looks on the price chart.

One of the primary applications of the Moving Average indicator is to predict future price movements with high accuracy. As we can see in the above chart, the slope of the line determines the potential direction of the market. In this case, it is a clear uptrend.

Every Moving Average has its own level of smoothness. This essentially means how quickly the MA line reacts to the change in price. To make a Moving Average smoother, we can easily do so by choosing the average closing prices of many candles. In simpler words, higher the number of periods chosen, smoother is the Moving Average.

Selecting the appropriate ‘Length’ (Period) of a Moving Average

The ‘length’ of the Moving Average affects how this indicator would look on the chart. When we choose an MA with a shorter length, only a few data points will be included in the calculation of that MA. This results in the line overlapping with almost every candlestick.

The below chart gives a clear idea of a small ‘length’ Moving Average.

The advantage of a smaller length moving average is that every price will have an influence on the line. However, when a moving average of small ‘length’ is chosen, it reduces the usefulness of it, and one might not get an insight into the overall trend.

The longer the length of the moving average, the more data points it ll have. This means every single price movement will not have a significant effect on the MA line. The below chart gives a clear idea of a long ‘length’ moving average.

On the flip side, if too many data points are included, large and vital price fluctuations will never be considered making the MA too smooth. Hence we won’t be able to detect any kind of trend.

Both situations of choosing ‘lengths’ can make it difficult for users to predict the direction of the market in the near future. For this reason, it is crucial to choose the optimal ‘length’ of the Moving Average, and that should be based on our trading time frame and not any random number.

Conclusion

Moving Averages generate important trading signals and especially when two MAs are paired with each other. They give both trend continuation and reversal signals with risk-free trade entries. A simple way of reading the MA line is as follows – A rising MA indicates that the underlying currency pair is in an uptrend. Likewise, a declining MA means that the currency pair is in a downtrend.

In the next article, we will be learning two critical types of moving averages – Simple Moving Average and Exponential Moving Average, along with their applications on the charts. Stay Tuned!

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Forex Basic Strategies

Trading The ‘Symmetrical Triangle’ Chart Pattern Using SMA

Introduction

Introduction

Introduction

A Symmetrical Triangle is one of the most reliable chart patterns in the market. This pattern is characterized by converging two trend lines, which are drawn by connecting a series of peaks and troughs. The Symmetrical Triangle pattern is made up of price fluctuations where each swings high and swing low makes lower highs and higher lows. Essentially, the coiling movement of price action creates the structure of a Symmetrical Triangle. When the triangle is forming on the price chart, it indicates that neither the sellers nor the buyers are pushing the price far enough to create a clear uptrend or downtrend.

This pattern is also known as the ‘coil’ because, most of the time, it forms in a continuation phase. Symmetrical Triangle pattern consists of at least two lower highs and two lower lows. So when these points are connected, the lines converge, and the Symmetrical Triangle takes shape. A part of the trading community believes that if this pattern is formed in an uptrend, the price will break upward. Likewise, if the pattern forms in a downtrend, the price action will break downward. However, these are just assumptions and are not entirely true.

The reason for the formation of the Symmetrical Triangle on the price chart is because of the lack of volume and price movement in any underlying currency pair. This eventually results in the formation of a coiling pattern. Hence it is merely impossible to find out which side of the pattern will breakout.  The only way to trade this pattern is to let the breakout happen on any of the sides and take the trade only after confirmations.

Symmetrical Triangle Chart Pattern – Trading Strategies

Conventional Way – Buy Example

Step 1 - Identifying The Pattern

We can see the formation of a Symmetrical Triangle pattern in the below GBP/NZD Forex pair. We can observe the market coiling and not moving in any certain direction, which eventually resulted in this pattern.

Step 2 - Entry, Stop-Loss & Take-Profit

In the below chart, we had taken the entry when the price action broke the upper trend line. This pattern is pretty reliable but needs a lot of patience as the only way to trade is by stalking the charts. We can notice the market blasting to the north immediately after the breakout of the upper trend line. The stop-loss is placed just below the lower trend line, and the take-profit is placed at the higher timeframe’s resistance area.

Conventional Way – Sell Example

Step 1 - Identifying The Pattern

The formation of the Symmetrical Triangle pattern can be seen in the below AUD/JPY Forex pair. The market was in an overall downtrend, but from 28th – 30th January, it turned into a consolidation phase, which resulted in the formation of this pattern.

Step 2 - Entry, Stop-Loss & Take-Profit

However, on 30th Jan, the lower trend line was broken, indicating a sell signal in the AUD/JPY Forex pair. The entry can be right after the breakage of the lower trend line if you are an aggressive trader. But for conservative traders, it is recommended to watch for the bearish confirmation candles and then take the trade.

Here, we have gone for two targets. The first one was at the recent low, and the second target was a bit deeper, which is at the higher timeframe’s support area. If you are an intraday trader, then the TP1 is a good location for you to close your position. But if you are a swing trader, TP2 is the best match. Most of the time, the breakout trades do perform, and that is the reason for us to use the recent higher low as an appropriate stop-loss placement.

Symmetrical triangle + Simple Moving Average

In this strategy, we have paired the Symmetrical Triangle pattern with Simple Moving Average to identify accurate trading signals. SMA is a technical indicator used by almost every technical trader to identify the market trend. A smaller period average reacts more to the price action, whereas the larger period tends to respond less. If the SMA is below the price action, it means that the trend is up, and if it is above the price action, it indicates a bearish trend.

Step 1 - Identifying The Pattern & Plotting SMA On To The Price Chart

We can observe the formation of a Symmetrical triangle pattern on the EUR/NZD Forex chart.

Step 2 - Knowing What Not To Do

One of the most common ways of trading the Symmetrical Triangle and SMA is to let the price action go above or below the MA line to take an entry. But that approach is riskier, and let’s see why. In the below image, we have marked two circles where the MA generates both buy & sell signal. It is clear that the selling signal failed to perform, and the price action goes above the SMA. When the price broke the SMA, some traders might have taken buy entries, but that’s an immature way to trade this pattern. The reason for the formation of the Symmetrical Triangle is due to the lack of volume or price movement. So there is no way to know which side of this pattern will break.

Step 3 - Entry, Stop-Loss & Take-Profit

The correct way to trade the Symmetrical Triangle pattern is to use both of the trading tools in conjunction with each other. When the SMA goes below the price action, it confirms that the prices are more likely to break upside. When strong buyers break the Symmetrical Triangle with strong power, it’s a clear indication for us to go long. So we have entered the market right after the price broke above the upper trend line of the pattern.

If you are a confirmation trader, we recommend you wait for the price action to hold above the Symmetrical Triangle to take a ‘buy’ entry. For this particular strategy, we placed the stop-loss below the SMA, and take-profit was at the higher timeframe’s resistance area. After our entry, we can see the buyers blasting to the north, and we end up milking 100+ pips in this Forex pair.

Conclusion

The Symmetrical Triangle pattern is widely used among traders. The difficult part of trading this pattern is predicting the direction of the breakout. All we can do is to watch the charts until the breakout happens and anticipate the trade. The traditional way to book the profit is at the beginning of the triangle itself. However, we can use some other approaches such as higher timeframe’s S&R areas, supply-demand zones, or exiting the position when the market turns into a consolidation phase.

We hope you had a good read. Let us know if you have any questions in the comments below, and we would love to answer them. Happy Trading.

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Forex Assets

Analyzing The USD/HUF Forex Exotic Currency Pair

Introduction

Introduction

Introduction

The US Dollar versus the Hungarian Forint, in short, is represented as USDHUF. It is an exotic currency pair in the forex market. It has got high volatility and lower volume compared to major and minor currencies. Here, USD is the base currency, and HUF is the quote currency.

Understanding USD/HUF

The value of this pair represents the number of HUF that are required to buy one US Dollar. It is quoted as 1 USD per X HUF. If the current market price of USDHUF is 307.72, these many Hungarian Forints are needed to purchase one unit of USD.

Spread

Spread is the primary way through which brokers generate revenue from their clients. The pip difference between the bid price and the ask price is their revenue, which is referred to as the spread. Spread is different on ECN accounts and STP accounts.

ECN: 16 pips | STP: 15 pips

Fees

On ECN accounts, one has to pay some pips of fee on each position you take. The fee is usually high on exotic pairs and comparatively less on major and minor pairs. However, on STP accounts, the fee is nil.

Slippage

Slippage in trading is the difference between the client’s intended price and the price the broker actually gave him. Slippage is affected by two factors:

  • Broker’s execution speed
  • The volatility of the market

Trading Range in USD/HUF

The representation of the minimum, average, and maximum volatility of a currency pair is the trading range. It shows the volatility of the market in different timeframes. And these values help in figuring the profit that can be gained or loss that can be incurred on a trade.

Procedure to assess Pip Ranges

  1. Add the ATR indicator to your chart
  2. Set the period to 1
  3. Add a 200-period SMA to this indicator
  4. Shrink the chart so you can assess a large time period
  5. Select your desired timeframe
  6. Measure the floor level and set this value as the min
  7. Measure the level of the 200-period SMA and set this as the average
  8. Measure the peak levels and set this as Max.

USD/HUF Cost as a Percent of the Trading Range

Cost as a per cent of the trading range is the representation of the cost discrepancies for different volatilities and timeframes. With these values, we can determine the moments of the day when the costs are less. And this shall be discussed in detail in the next topic.

ECN Model Account

Spread = 16 | Slippage = 3 |Trading fee = 3

Total cost = Slippage + Spread + Trading Fee = 3 + 16 + 3 = 22

STP Model Account

Spread = 15 | Slippage = 3 | Trading fee = 0

Total cost = Slippage + Spread + Trading Fee = 3 + 15 + 0 = 18

The Ideal way to trade the USD/HUF

We know that exotic currency pairs typically have high volatility and low trading volume. Also, the total costs on trade are pretty expensive. Hence, one must be choosy while deciding when to enter the market.

The higher percentage values in the min column represent that the costs are high when the volatility of the market is low. And the opposite is the case for lower percentage values. However, it is not ideal to trade during any of these times.

One may trade these currency pairs during those times of the day when the volatility values are around the average values. This will ensure decent volatility as well as low costs on the trade.

Furthermore, another simple way to reduce costs is by trading using limit orders and not market orders. Because this will take away the slippage on the total cost, and this will, in turn, reduce the total cost significantly. An example of the same is given below.

With slippage

Spread = 16 | Slippage = 3 |Trading fee = 3

Total cost = Slippage + Spread + Trading Fee = 3 + 16 + 3 = 22

Without slippage

Spread = 16 | Slippage = 0 |Trading fee = 3

Total cost = Slippage + Spread + Trading Fee = 0 + 16 + 3 = 19