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Forex Moving Average Crossovers

The Moving Average Line

Traders often use a simple moving average created with a larger number of periods (such that it is reflective of long term trends) as an average price line – a line that serves as a base point for the market to move with, above, or below.

This long-term average price line should serve as a support line in an uptrend and a resistance line in a downtrend.

If prices penetrate that long-term average price line, the trend could be slowing, the market heading toward a reversal.  Certainly don’t trade on that first average price line penetration alone; wait for confirmation signals that the market is indeed heading to a reversal.

Moving Average Crossover

In addition to using a simple moving average as a long-term average price line against which you can measure current price movement, two moving averages (one fast, one slow) can also be used together to generate buy and sell signals.

This type of indicator is called the moving average crossover, and can be a very nice compliment to the average price line.

The moving average crossover indicator is formed of two exponential moving average lines.

One is considered fast; that is, it incorporates a smaller number of periods and therefore reflects more of the current market volatility.

The other exponential moving average line (EMA) is considered slow; that is, it incorporates a larger number of periods and therefore reflects more long term movement and less of the current market movement.

Different traders create the exponential moving averages with different number of periods.  However, a safe default is to set the fast indicator at 10 periods and the slow indicator at 25 periods.

Again, the numbers 10 and 25 refer to the number of previous periods encompassed in the moving average.  The moving average set 10 periods back is referred to as the fast moving average because it is more volatile (swings more) because it only encompasses 10 periods.

The moving average set 25 periods back is referred to as the slow moving average because it is less volatile (it swings less, or more slowly) because it encompasses 25 periods.

As the indicator’s name suggests, you will be looking for forex trading signals when one of the exponential moving averages crosses over the other. If the slow EMA (the one set at 25 periods) crosses over the fast EMA (the one set at 10 periods) the market is likely slowing down, possibly heading into a new downtrend.  Therefore, when the slow EMA crosses over the fast EMA, the market is offering you a sell signal.

Wait until you have confirmation of the reversal from other indicators (such as a trendline break, a King’s crown, etc.) before trading on the moving average crossover.

Conversely, if the fast EMA crosses over the slow EMA, the market is likely speeding up, possibly heading into a new uptrend.  Therefore, when the fast EMA crosses over the slow EMA, the market is offering you a buy signal.

Wait until you have confirmation of the reversal from other indicators (such as a trendline break, a King’s crown, etc.) before trading on the moving average crossover.

Posted in indicators

Trending Days in Currency Trading

Over the past two days I’ve been explaining “trading days” in the foreign currency exchange. Today I’m going to explain the procedure for attempting currency trading on “trending days.”

Trending days, in contrast, are characterized by the following external events and conditions:

1. A fundamental announcement is released during the session.
2. Price movement is aggressive (fast).
3. Market movement (volatility) during the session creates large trading ranges of 120 to 300 pips.
4. Prices don’t close near the session’s opening price.
5. Price movement during the session creates an uptrend or a downtrend.

Currency Trading on a Trending Day

If you plan to day trade currencies on the trending day, cancel and replace on a 30-minute forex chart. There are two currency trading strategies on a trending day: the first is to trade the straddle (when the session’s fundamental announcement is preceded by consolidation).

The second is to trade a convergence (when the session’s fundamental announcement is not preceded by consolidation). Refer to our earlier discussion of trading the straddle for the why’s and how’s of that type of trade.

Trading a convergence on a trending day is similar to trading a convergence on a trading day (except that you will not see the formation of a bell curve on a trending day).

Begin at the anticipated release of the fundamental announcement – that’s where you will expect that market to break into a downtrend or an uptrend. Look for consolidation to make sure that you should not be trading a straddle – if there is no consolidation, you’ll trade the convergence. Draw your inner, outer, and long-term outer trendlines.

Next set your Fibonacci lines based on the latest price swing. Based on your trendlines and your Fibonacci numbers, do you see a possible convergence? If equity management allows, trade the convergence in the direction of the trend.

If the fundamental announcement reverses the current trend, your losses will be confined to the distance between your entry and  stop loss order. In addition to using the trendline and Fibonacci numbers to set up your trade, you can also use your technical indicators (MA crossover, MACD, etc.) to help you anticipate the market’s movement.

Rules for Currency Trading on a Trending Day

The general rules for currency trading a convergence on a trending day are:

1. Locate the point at which the fundamental announcement will be released. Plan to create your market order 15 minutes prior to the fundamental announcement.
2. If there is a fundamental announcement planned for the trading session, but the market is not in consolidation prior to that announcement, you’ll trade a convergence (if the market is in consolidation prior to the announcement, you’ll trade a straddle, described earlier).
3. Find and draw all your trendlines (inner, outer, and long-term outer). This will help you determine if the market is trending up or down, or if a trendline has been broken.
4. Locate the price at which you anticipate the market will bounce (at the trendline and/or one of the Fibonacci numbers). If the anticipated trendline bounce and Fibonacci bounce are located at the same price, you will trade a convergence. 15 minutes before the fundamental announcement is released, place an order to buy or sell the convergence in the direction of the trend.
5. Find the last level of support or resistance to determine where to place your stop loss order.
6. Practice sound equity management. If you can’t afford the potential loss (the loss you would incur should the market reach your stop loss order), don’t make the trade.
7. Create a trading plan. Trade the plan.

By understanding the market’s likely movement on a currency trading day and on a trending day, you can prepare yourself to make more solid, predictable trades.

The principles you use to make your trades are largely the same no matter what kind of session you’re in (e.g. trading a trendline bounce, Fibonacci bounce, a convergence, a candle formation, or technical indicator) but having an idea of whether the market is going to move slowly, closing near the open or move aggressively downward or upward can help you immensely in making consistently profitable trades.

Posted in Fundamental Announcements

Fibonacci Number Trends in Forex Trading Online

I’ve been describing the fibonacci sequence & trading forex online in the last several blog posts. There are a few more concepts to share to give you the full story about fibonacci numbers trends applied to forex trading online. If it seems like this is too complicated, it will seem much easier in the video examples I’ll be sharing soon

Looking at a Fibonacci ratio in an uptrend for forex trading online, buy after the market has reacted (retraced) back to the .618 or .786 of the last up price swing to make a higher low.  Set your stop loss order at the last low.

The best place to trade, of course, is at a convergence, where the market has more than one reason to bounce.

If, for example, the market makes a higher low at a Fibonacci ratio and at the trendline, that is a convergence.  Generally speaking, in order to use the Fibonacci ratios to make money, you must place your entry order before the projected retracement bounce (at .618 or .786, for example) and place your exit order before the projected extension bounce (at 1.618 or 1.27, for example).

The .618 and the .786 offer the least amount of potential loss (risk) so they are the safest places to trade.  At the .382 the market is moving fast and aggressively, so the potential loss could be quite high.  Remember to only trade if equity management allows.

If you do decide to trade the .382, do not buy at the projected retracement bounce (at the .382), but instead buy at the price of the last high.  Set your stop loss order at .382 and your profit limit order at 1.618.

If you decide to chase the market for profit, canceling and replacing as the market moves, do not cancel your stop loss order (originally set at the last low) and replace it with the new low at the Fibonacci bounce until the market makes a new high.

If you enter at the projected bounce (.618, for example), setting your stop loss order at the last low and, after the market begins to rally, you cancel and replace your stop loss order from the last low to the .618 new low you risk being stopped out early if prices return to the .786 and bounce before going into the extension.  Remember that the uptrend is not extending until the market passes the last level of resistance and makes a new high.

The rules of cancel and replace, therefore, provide that you only cancel and replace your stop loss order if the market has made a new high.  The .786 is the last hidden level of support; if the market, in retracement, takes out the .786 and goes on to cover more than 88% of the original up swing, it is highly probable that the market is reversing.

Once the market has bounced at the .786 (not taken it out), move your stop loss order to that new low at .786.  That way you will be protected if the market does not go into an extension.

Forex Trading Online Fibonacci Numbers in a Downtrend

To trade a Fibonacci ratio in a downtrend, sell after the market has reacted (retraced) back to the .618 or .786 of the last down price swing to make a lower high.  Set your stop loss order at the last high.  As with an uptrend, the best place to trade is at a convergence.

Generally speaking, in order to use the Fibonacci ratios to make money, you must place your entry order before the projected retracement bounce (at .618 or .786, for example) and place your exit order before the projected extension bounce (at 1.618 or 1.27, for example).  The .618 and the .786 offer the least amount of potential loss (risk) so they are the safest places to trade.

At the .382 the market is moving fast and aggressively, so the potential loss could be quite high.  Remember to only trade if equity management allows.  If you do decide to trade the .382, do not sell at the projected retracement bounce (at the .382), but instead sell at the price of the last low.  Set your stop loss order at .382 and your profit limit order at 1.618.

If you decide to chase the market for profit, canceling and replacing as the market moves, do not cancel your stop loss order (originally set at the last high) and replace it with the new high at the Fibonacci bounce until the market makes a new low.

If you enter at the projected bounce (.618, for example), setting your stop loss order at the last high and, after the market begins to down swing, you cancel and replace your stop loss order from the last high to the .618 new high you risk being stopped out early if prices return to the .786 and bounce before going into the extension.

Remember that the downtrend is not extending until the market passes the last level of support and makes a new low.  The rules of cancel and replace, therefore, provide that you only cancel and replace your stop loss order if the market has made a new low.

The .786 is the last hidden level of resistance; if the market, in retracement, takes out the .786 and goes on to cover more than 88% of the original down swing, it is highly probable that the market is reversing.

Once the market has bounced at the .786 (not taken it out), move your stop loss order to that new high at .786.  That way you will be protected if the market does not go into an extension.

Posted in Fibonacci