Forex Analysis and Trading Blog

a Strong indicator for any market is the 200 Simple Moving average, by watching this simple indicator you can see where a tremendous amount of the market seems to use it as a Trend following as well as when a trend reverses. One of the things I have found is that most all timeframes will have a bounce around that moving average.

The question is to take advantage of it, for those that can do it, we use a Envelope indicator as a wrapper around the 200 SMA, this allows you to specify 1 interval, with the data coming from the 200 SMA, and you get a set of 2 lines a bit outside the 200 SMA.

This is the breakout, this gives the market the ability to figure direction and movement, then breaking out of this envelope will give you your entry. It can be used on any timeframe, but ALWAYS be aware of the larger timeframes in conjunction with the lower ones you are trying to use. (if the 1hr is in the envelope, don’t trade the 15 minute breakout).

As a learning experience, put a 200 SMA on your charts, look at the 4hr and daily during trending times, as well as choppy times. Check to see how the breakout occurs and amount it moves. ALWAYS look at the angle of the 200 SMA, it will tell you how much a breakout against that angle will be, as well as if it is going with the trend, the greater chance of larger moves.

Remember all moving averages have 3 states, Trend up, Flat, Trend Down, any price action AGAINST that trend, the majority of time it will retest the 200 as support/resistance, before it moves and changes the trend it must, I repeat MUST, become flat, then it can change direction.

We will be coming soon , with a Expert advisor for MT4 with this breakout strategy and how to use it, it will be limited release.

I will talk more about this later this week.

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All right, we have gone thru several things, last thing is looking at trends, we all know “the Trend is your friend” this is true. So the qestion is, where does a trend form, where does it start and when should you look to enter?

that will depend on your risk, all I can say is pick 3 timeframes, So lets take Day, 4hr and 1hr timeframes, what we are looking for is when all three line up and run, we will trade that direction. each time the 1hr retraces we wait till the other 2 line back up and trade again.

You will have to use some momentum and some resistance / support to tell when your getting a new move or breakout. Demark indicator, or something like that can do just that.

you can also use 2 timeframes, but your oscillations can be larger, causing larger loss’s on your account, 3 is a good number.

as a suggestion, look for these in your trade styles, look for the beginning of the trend, and wait for the first retracement, mark that spot and then wait and alarm when it breaks that level again. Do that a few times and you will see gains.

next time we will talk about the 200 SMA and how you can use that on each timeframe as a breakout indicator.

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One of the items that has been done expecially using the Mt4 platform and FXCM is the use of Hedging, this process allows you to basically take off the stop Loss’s and do a reverse trade opposite of your current trade and match the lotsize so it becomes a zero trade as it moves, (exception of swap).

I have always said that it is the quickest way to lose your account, why? basically the drawdown, the amount of dollars your trading vs what you will need to do to get out of the trade, also doubling up on the hedge again and again eventually overleveraging your account and a margin call.

SO how do you really get out of a hedge…..

There are 2 methods I have came up with that works, both are a risk and both are intensive as far as your attention is concerned, there can be a EA(expert advisor) written for this but suffice to say you can test both strategies and see what happens.

Most conservative:

Using the DAY, 4HR and 1HR make sure all 3 match direction, I use the Psar and EMA’s for direction on a trend, I want to make sure all 3 are trending the same direction both by the EMA and the PSar.

Using Pivots, look for the R1 and S1 levels, depending on the Trend, put an order 2 times the lotsize above the R1 or below the S1 with a 1hr ATR(average True Range) stop Loss. Since your matching up 3 timeframes, the odds are working with you on the move, the breakout of the pivot lines gives you the opportunity for the move, and the SL is your protection.

Put a Take profit, at least the Spread below the R2 or above the R1, the majority of the time the pair will hesitate around the R2 or S2 before possibly moving foward. if it does, you can always set another trade below or above the S2 or R2.

Once you have done this and Taken Profit, calculate the amount gained vs amount lossed, if your Ahead, then cash out all trades with a small gain. your out of the trade.

IF not, then keep that amount you gained and start over again, doing the same thing till you manage to gain enough over time to exit the trade.

Option: on the gain, sell a portion of BOTH sides of the hedge trade, this is tricky because you don’t want to sell off more than you gained, so look at mini/ or micro lots to reduce it by a portion. (around 1 dollar per pip on a mini). so if you gained 100 dollars on the breakout trade, you can reduce each side by 50 pips. (1 micro).

Style 2: using only the 4hr and 1hr do the same as above. The only problem is if the day is opposite, you can hit resistance or support on the day and it can reverse, this will cause more loss’s as you try to exit the trade.

Also as your trading and using other pairs, the gains from those pairs can allow you to reduce the lotsizes of your hedge till it is minimal. then you can cleanup the remainder easier.

As another option, if the hedge is due to a trending retracement, and one side is a gain, you can set the SL of the side of the retracement to be at your entry or entry +2, this is risky as your assuming the trade will resume the trend, and you may get into a wider hedge that will be more difficult to remove.

the basic thing is DON’T PANIC. this is not an overnight process that can be done in an hour or two, it takes time and effort.

Good Luck!!!

Andy (cowboy) Stapleton

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Well now, we have Looked at a few indicators, knowing full well PRICE is the only “leading” indicator. so how do we use them.

Lets first look at 2 things,

1) what timeframes are we going to trade on.
2) what Timeframes are we going to use to determine trend.

Remember the Trend is your friend, that is all there is too it. so Lets pick a couple.

Day Chart - Determine overall trend,
4hr chart - determine intraday trend and retracements during the 2 major Exchanges.
15 minute - this is our entry point.

you can change them, using 4hr, 30min, 5 min , that is fine, it will depend on how you refine your trading, but I have settled on using the three above, and only changing my entry point based on either 5 or 15.

now, how do I know when to enter?

Remember Price is still king, so looking for exact numbers to break, and confirming with the trend will quite probably give you the best trade possiblity.

As an example, we looked at the day, and 4hr and see because we put Moving Averages that both are trending LONG, (or UP). and looking at the 15 minute, we see that it is a DOWN Candle or DOWN bar…

If we have targeted the resistance of the 15 Plus a few pips, we can easily set an alarm there and look at the trade and then enter or not depending on the cercumstances. The real question is determining those resistance and support lines.

Here is where the ole standby Pivots come into play, there are 3 basic lines, a Resistance, Support, and Pivot or center. we can use these to put our target alarm. Lets say the price is below the Pivot Line, but the overall trend is LONG, well we can set an alarm 5 or 10 pips above the pivot line , if the price changes and then reverts back above the Pivot Line, our alarm goes off, we can then look at the indicators to confirm our entry and then we are in.

No matter what kind of trading style you use, Using Resistance and Support to give price target points should be one of the items you use. When you start your trade plan, setup a “CheckList” this will assist you in insuring your trades are consistant.

next time we will go over Risk/Reward.

Andy (cowboy) Stapleton

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Ok, that is the question, how do you determine a breakout?

there are again, many schools of thought, let’s concentrate on the 2 easiest.

1) using daily pivot points, determine the resistance level 1 and support level 2 and once those are broken by a new candle, it is a breakout.
2) draw a line at the tops of the candles(wicks or body) and once the candles break that , then it is a breakout.

Pivot points have and always will be a predictive indicator, the use of pivot points have been in place for YEARS, so which one to use? , well I say BOTH……

Using the pivots will definitely tell you resistance and support levels for the next day, that is important for knowing where the industry looks for support and resistance, so I woudn’t discount these at all. BUT, yes, if tops of a set of candles is close to the resistance or support, you cannot discount that either.

So how do you solve it? Simple, and a “not bad” rule of thumb, IF the tops of where you draw your breakout line say on the 4hr chart is within 1hr Average True Range(ATR) then use that for the breakout. if it is over 2 ATR of the 1hr, then I would use it as a possible Take profit area, as we all know there will be congestion in that area.

Reading charts is subjective, if you feel it is close enough, then be conservative, and use it for the breakout line.

Andy (cowboy) Stapleton

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Ok, well we defined that there are dozens of styles, now let’s talk about indicators and timeframes.

On the subject of timeframes, there are 2 schools of thought; one says that multiple timeframes are mandatory, that to have a trade plan that doesn’t include larger timeframes for overall trend would kill your account. Then there is the other school, all you need is one timeframe, use that get what you can get between the resistance and support.

I believe in both, with a caveat, determining the trade style used….

In looking at a pair , you are subjected to several items that will determine first of all a Trade Style, then a Trade plan. Looking at charts you can tell fairly quickly if the pair is doing one of the following:

a) Trending
b) Oscillating
c) Consolidating
D) Retracing

In my opinion those are the only things a pair can do, once you know which one the pair is doing, then you can pick one of the styles that fit the pair, or don’t trade it.

So on you “big chief” (I know I just told my age) tablet write down what trade style you know and familiar with, then look at each pair, “OBJECTIVELY” and write down the pairs that fit the style you have down. If it is “iffy” doesn’t fit or barely fits, exclude it.

Now based on that, you now know which pairs fit your known trade styles and which ones to trade because of it. Let’s take it one step further. If you’re a manual trader, beside each of the pairs you wrote down, on a scale of 1-10 give it a score on how close it is to your trade style and then only trade those pairs to further narrow it down.

INDICATORS
Despite the MASS amount of indicators out there, there is only one “INSTANTANEOUS” indicator, PRICE, so the price is king, either looking at candles(my preference) or sticks, doesn’t matter it moves first then everything follows.

Now that we got that out of the way, there are basic indicators for trends, Oscillators, and volume, (in MT4 another category of Bill Williams is there also). Unless there is something else out there, 99% of ALL other indicators are based on one of these to give you a different view of the same thing.

Out of the trend indicators, Moving Averages are probably the most popular, although in my opinion the slowest, but they ARE quite useful, we use a 10,20,50 and 89 EMA on typical price to tell the trends and easily see a retracement/consolidation/possible reversal. We don’t trade crossovers, too slow, by the time you get into a cross, the price has moved, and if it is NOT trending, you will have a loss.

CCI - Commodity Channel index, quite a good one, this will give you quite a few indications on a trend and is quite useful especially if you use it on multiple timeframes.

Parabolic Sar - Primarily used as a Stop Loss, but there are other things you can use this for in trending to work.

ADR - Average Directional Movement- little slow, but uses crossover on 2 lines with oversold and overbought line, good for trend bad for oscillation.

So which ones to use? I suggest some EMA’s and at least a 200 SMA to know overall trends, CCI , will help you confirm entries and the PSAR will give you a good indication on if you’re in the move too late.

Oscillators - MACD, RVI, ATR, RSI,Stochastics, WPR, there are several, read over each and see which one fits your needs, Oscillators are important, it gives you pertinent information on basically the strength of ever move that happens and possible weakness in the move.

if you’re not familiar with oscillators, put a couple on the charts and look at the reactions based on the trend indicators. IE: when the trend resumes, see what the oscillator looks like, and whichever gives you the “quickest” indication, that is the one to use, study it, understand it and know what information it gives you.

FUNDEMENTALS - this is one item that I feel most traders ignore, either it is too hard to understand what they are, or what they mean, and basically even the explanations can be confusing. In the next article we will discuss fundamentals and which ones to pay attention too and which ones to avoid trading period.

Andy (cowboy) Stapleton
Skype: Forexmgr

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after 4 years of trading, and teaching how to trade for the last 2 1/2 years or so, there still seems to be a great divide in trade plans, and ultimately trade styles. I have seen where on different newsgroups, a Pleathora of Expert Advisors (used on Metatrader 4) that is touted as being the “best thing since sliced bread”, multitude of homegrown indicators that is supposed to be the “least lagging indicator” , all the way to using 5-10 indicators for a perfect entry that literally never happens.

So, here is a series of blog entries on the makeup of a good trade plan, what to look for , what to see and even a few bits of code for EA’s.

Lets take a bit of background, there are scapling strategies, Hedging strategies, Carry strategies, Trending Strategies, etc, etc….. first step, is to find which one fits your needs…

Scalping strategies are high volumn times, your limited to certain timeframes, due to you looking for price movement strong enough to get you past any spread and into profit, these usually are on smaller timeframes like the 15 minute, 5 minute and even some 1 minute timeframes. The problem I see with them, is your not looking at the overall picture, it is targeted to the one timeframe to the exclusion of most all other timeframes and eventually you are going the wrong direction and lose.

Hedging Strategy, - a bit harder to understand, it actually uses hedging to move up or down in an oscillation , taking profit at both the tops and bottoms, only problem, is determining the tops and bottoms. Frankly one of the quickest methods to lose money in my book.

Carry strategy - a lot like the hedging, only your adjusting lotsizes using 2 different pairs, so going short on one gains interest, and long on the other pair gaining interest, takes 2 things to make this work,
1) correlation of the pairs has to be correct, any deviation can cause to have large drawdowns.
2) other type is a entry on each 100 or so pips down, fraught with danger, if you look at the current JPY pairs, the amount of drawdown would be enormous.

Trending - Now everyone wants this, get into a long trend, and allow it to gain, multiplying on each entry….. nirvana…. Problem is , when to determine a trend, how long it will last and what drawdown are you willing to accept to stay in the trend.

So, now that we know all the problems , we should have the solution, right? hang on, you still have to take into account fundementals, market conditions, current liquidty conditions and even the DOW.

Daunting isn’t it?

Not quite as bad as it seems. Next blog entry we will go over a few indicators we can look at to help that, looking to build a better mousetrap.

Andy (cowboy) Stapleton

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Most all pairs after the NFP retraced and now are range bound for a bit, market is looking for directions.
All information below is based on 4hr and day charts.

AUD/JPY - last 12 hrs has broken above the 200 SMA on the 4hr chart, we see a bit of trend moving upwards as it in the last few hours is retesting the upper envelope on the 200 SMA. a break above 96.40/50 would signal further move to the 89 EMA and possibly higher on the Day chart. Good news is the MACD on the day chart is showing promise as the bars has broken now to the upside, and the CCI is high. I expect a rest , a bit of choppy around the 4hr 200 SMA, retesting the support, but I am watching the day chart for the upward move.

AUD/USD - after hitting the 200 SMA on 3/28 we now have broken thru on the second attempt, Looking for further pressure on the day chart upwards in 1 or 2 days as the MACD is looking to reverse and follow the CCI to a positive stance. Resistance on the day chart is well up Close to the 9500 range, a good bounce with some dollar weakness could get us there.

EUR/CAD - Pair has retraced quite a bit, with now looking to resume the upward trend, Day chart tells more , as the pair breaking below the 20 EMA held short of further loss’s and now has started back up across the 1.5900 range. Watch the MACD on the day, as it may start to flatten out.

EUR/JPY - After retracing latter part of last week, we are back in the upward trend, although choppy, this is partially due to the expected Rate decision on Thurs this week. ECB is scheduled to leave rates unchanged, but I am watching closely for any statements that indicate a less than “hawkish” thoughts. Day chart shows we hit the 200 SMA, and now looking to see if we can manage to break through this week. Movement above the 161.50 is a good indicator of the trend continuing at least to the mid 163 range.

EUR/USD - Range Breakout, I don’t see a breakout until above 1.5780/90 and below 1.5600/5590.

GBP/CHF - Range Breakout, Upper Range 2.0215/25 with lower range 2.0000/1.9910 - may expect some movements by thurs based on the expected 1/4 point reduction in rates from the GBP, the MPC minutes and Vote Tally would be the drivers.

GBP/JPY - Choppy around the 200 SMA, Day retracement to the 50 EMA is possible, MACD shows promise as it now has flipped on the bars and CCI is pressured to the upside, I would need to see a break above the 50 EMA to consider a retracement move to the resistance of 208.98, and I don’t expect to see that till late this week.

GBP/USD - Range Breakout, 2.0015/25 on the upper side, with support at 1.9750/40 range.

NZD/USD - has reached up and touched the lower envelope on the 200 SMA , 4hr chart, another move breaking the 80 cent mark would have to occur for further upward movement, Pressure is there on the 4hr and it is weakening on the day chart, after reaching down and holding the 89 EMA for support. it still will be a day or 2 before you can see a reversal on the day chart though.

USD/JPY - Weak break above the 200 SMA on the 4hr chart, Day is ranged between 103 and 100, will need to see a break above the 50 EMA on the day chart first, for upward moves, or a reversal below the support for further weakness.

Andy (cowboy) Stapleton

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Was reading around the web, looking for articles and such on the forex, ran across a Market insight article from LFB, where they are discussing the fact that brokers monitor trade patterns.

This has been a common occurrence in ALL aspects of the web, your searches, your purchases on Ebay, your methods of taking care of your bills online, insurance, Stock trades, on and on an on. So of course they are monitoring trading patterns; the question is “is it a bad thing or good?”

That of course will depend on the broker….

In order to run a brokerage, you learn the traders that are profitable, and those that are flat, and those that lose based on statistics and trading patterns, Profitable traders are routed primarily to the interbank, flat, may or may not and those that are losers are not sent.

Brokers make money 3 ways,

1) trading against those that are in the losing patterns (they get to keep spread and trade).
2) allowing the losing patterns to trade a percentage against the Flat and winners.
3) munipulating the Swap, (they take some from the gains and a LOT from the losing side).

The item to watch for is a couple of things, and this is where you need to look ….

a) is there a lot of slippage?
b) Spikes (some are inherent).

Here is the article on the market http://forexfactory.com/news.php?do=news&id=77057

IF this concerns you, then look for a ECN type provider, ECN provide a method or transportation of your order to the interbank, charge a fee, but has no dealing desk, unfortunately they usually require a much larger account.

Andy (cowboy) Stapleton

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We are setting at the 200 SMA on the 4hr chart, watching where the pair should and could possibly move. the 10 EMA is catching up to the 200 SMA now, and that would cause some volitility in the pair.

Patience is a key factor here, for the longer term trading, Dollar still has a perception of weakness, but with the Vote this last week being 7-2 vs the 8-1 projected, there are a lot of traders looking at further weakness in the GBP.

Looks to me the key factor is the day chart, We had bounced above the 200SMA there, then fell off sharply, hitting support at the 1.9720/30, the question would be if that support will hold.

I look at the 200SMA on the day chart, and it is flat, looking for the next move,4hr is also in this position, so we need to now see where the market is going.

My thoughts….

A break below the support level of 1.9720/10 would be indication of further move to the downside with a possible move to the 1.9500 area, we would need a break above the 2.01 to re-evaluate for longer term upward moves.

Watch the commodities, they have broken short, this may be a pullback, for a short time, or some profit taking, so I would need to see further degrading of that market before I think the bubble on commodities has burst.

Andy (cowboy) Stapleton

All thoughts are my own, no buy/hold/sell recommendations , trading the forex is risky, and your on your own taking anyones advise, learn all you can and demo trade till you are consistant.

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