Two MA Cross

The Trading Strategy:

Two MA Cross

Trading Strategy Implementation:

Use the cross of the faster moving MA (in this case the 5 MA) over the slower moving MA (55 MA) as an entry. (MA selection and trading time frame, along with Money Management, would go on to create a trading system. We here are simply analyzing the strategy.)

Profits are taken at three times the distance between the entry and the stop. Stops are set at the previous low (if a buy situation) or the previous high (if a sell situation) with room for the spread plus one pip. Of course this method could be used in a variety of markets, so the spread may not have much meaning to you as a reader. For those of you who are Forex traders, the spread is certainly known, and determined by the broker and the pair traded.

This is a simple and often-used approach to trading, and as a strategy, actually carries some serious merit. The attraction to the method is that it is fairly simply to trade, and that the definition is certainly obvious.

Strategy Concerns:

There is a major concern that we have with any approach that requires an indicator to dictate entry. Indicators do lag, and even though some of these indicators do closely follow the price, they still do give reason for a trader to be concerned. (As you can see, we responsibly put the entry bar for notation not right at the cross; rather at the location of price when the cross appeared.)

Also, this trading strategy, like all MA trading strategies, requires traders to work on an active screen with a wiggling indicator. The moving average is a living, breathing thing, and this indicator does like to give false suggestions. To simply look at this indicator in frozen images, as we’ve presented, is somewhat misleading. We intend to follow up this explanation with a video presentation that touches on the weakness of such an approach. Moving averages wiggle, and deciding that one MA has definitively crossed the other is a somewhat subjective process of deliberation.

We did not bother to carry on with further accounts of the crosses for the particular day. As can be plainly seen, the market did not trend strong enough to sustain a reward that was three times the risk. These would plainly have been losses, but having said that, the fact is we’re addressing a New York Friday session, so to get in late and expect the market to trend considerably is probably a little hopeful.

Conclusion:

We Pipsters certainly do not trade with MAs dictating our decisions, yet each of us know at least a couple successful traders who are able to manage similar strategies, and manage them well. The strengths are in the simplicity. Any trade filter that would suggest an overall direction to trade (bull or bear) would be of service to such an approach.

Expectations for such a style of trading would have to be responsible. Some may suggest that the risk:reward ratio we suppose a trader to employ may be a little aggressive. This is possible. That said, this is a system that is based solely on one indicator crossing another, and it seems only reasonable to us that the risk:reward ratio be heavily in favor of the trader in order to offer long term probability for winning. We also feel the system would only be responsibly applied during heavy market hours in order to utilize volatility in and effort to define strong trend.

This is a trend maximizing strategy, and appears as though it would suffer in a choppy market.

Any suggestions for developing this strategy are welcome. Please do offer the community any thoughts you may have through the comments section.

Three MA Cross

The Trading Strategy:

Three MA Cross

Trading Strategy Implementation:

Use three simple MAs at different speeds and trade the crosses of the two faster moving MAs with the slower moving average applied as governance for the trend or direction of trades. This is probably somewhat a wordy explanation, and will certainly be helped with the support of images, which are provided below.

The idea is relatively simple. Three MAs are placed on a chart. In this case we are using the 15M chart. Chart preference is up to the trader. The Pipster belief is that the close to the tick chart, the less reliable the chart is. For the sake of explanation, we will apply the Three MA Cross trading strategy to the 15M chart for the sake of intraday traders.

The three MAs we have selected are the 5, 55, and 200. The reason for this has to do with speed. We need a MA that moves very close to the price action, one that moves at the speed of intraday trend, and finally, a moving average to move along with the overall market trend. The 5 is set to the price action. The 55 is set to intraday trend. And the 200 offers us an overall governor of market trend.

For the sake of simplicity, we will assign a simple color scheme to trio of MAs in order to help with understanding.

  • 5: Green
  • 55: Yellow
  • 200: Red

When the green and yellow are above the red, we are bullish. When the green and yellow are below the red, we are bearish.


As can be plainly seen in the image above, three MAs are placed on the screen, and the colors are defined as stated above.

As we dress another image of the approach (taken at random) we employ the trade strategy to the chart, and historically address the strategy’s success/failure in this market scenario. (For the sake of simplicity, the buy order and it’s relative SL and TP are color coordinated. The same can be said of the sell order.)

The trades are initiated at the point of the 5 crossing above the 55 for buys and the point of the 5 crossing below the 55 for sells. Again, as we employed with the Two MA Cross Strategy, we will set our Take Profit three times the distance of our Stop Loss. Our Stop Loss is set at the most recent trend starting area, as suggested by the image below.

In the particular image chosen at random, we see that the approach failed initially, with the buy unable to reach our intended target. The following trade, a sell, which would have been made around the 1.31490 area definitely would have led to a healthy win and net profit for the strategy.

Strategy Concerns:

As has been stated elsewhere on this Forex trading blog, any trading strategy that requires the use of an indicator for entries is going to have to be considered a risk. The reason for this is that the indicators are all derivative of price, and as a result, lag considerably. As was mentioned in the Two MA Cross, the fact is many false signals can also be given by a “wiggling” MA.  Sometimes it appears to cross, and then turn back. If the trader is to wait for the crossing, the fact is price has more than likely moved well beyond the point of the actual cross.

Conclusion:

We Pipsters do not employ such strategies, and for the most part look to do away with indicators. However, we do not claim, by any means, that they lack all relevance. This Three MA Strategy is preferred to the Two MA Strategy by us because we do like the trend following filter that is the slowest MA. Chances are the levels and time frames may need to be adjusted to properly work with certain markets. Nevertheless, there is definite merit in the approach, and we definitely can say that a sound Money Management system and strict adherence to the trade filters would likely lead to a responsible start for any trader.

Any suggestions for developing this strategy are welcome. Please do offer the community any thoughts you may have through the comments section.

Fibonacci Level Confluence

The Trading Strategy:

Fib Level Confluence

Trading Strategy Implementation:

This strategy is created by the use of confluence with Fibonacci levels. Because there is some definite contention out there in the world of technical analysis regarding which levels have the most merit, we will simply apply the ones that are most commonly referenced. This is the 38.6, 50.0. 61.8, and the 78.6.

The approach is relatively simple. The trader looks to find areas of Fibonacci confluence in order to time market turns. These areas of confluence are highly regarded, and often lead to market turns, which can, of course, produce low risk entries with high reward setups.

Another area of contention for Fib traders is the issue of where the move begins. Is it the start of the body of the candle? Or the spike of the wick? For the sake of simplicity, we will again refer to the most commonly attributed starts and ends of moves, which is simply the highest high or lowest low.

As for time frame, we have gone with a very simple 1 hour chart, and are looking at the very liquid EURUSD. This pair is put to the test with this Fib Confluence approach, and the findings do not surprise us Pipsters.

But let us allow the images to show the merit of the system….

The first image exhibits the two ranges chosen for each of the Fibonacci zones. The first zone marked in red denotes the November 30th to December 6th range, while the second, which is marked in blue, begins with the strong move shown in the market starting December 2nd. Of course there may be confluence veterans reading this who will contend with the choice of levels, etc… but for the sake of argument, we can all agree that the area of confluence between Fib levels is without a doubt the 3205 area.

Now, we’re not trying to sell anyone on the idea, so please do not feel we went back historically to find a chart that presents our case. We Pipsters DO NOT use confluence; nevertheless, if we’re to do this trading blog any justice, we need to give visitors as complete an experience as possible.

The second image shows exactly how the market responded to the area of confluence.


As can be seen, the level turned out to be of value. Although it was not held to the pip, and it certainly did not lead to a continuation in the bull move, the trade certainly, had it been initiated, would have led to pips earned for the trader.

As with all our trading strategies, we like to suggest a risk:reward ratio that is favorable to the trader. Trading is hard to begin with… and to make it harder by taking bigger losses than you take gains generally leads to margin calls.

Strategy Concerns:

The concerns we have are related to the challenge of applying trade management to the strategy. This is simply a look at the strategy itself. Trade management/money management/ and risk management all need to be considered for those of you looking to form trading systems.

Confluence does seem to have inherent value, and should be looked at by any interested Fib traders looking to improve entry precision.

Conclusion:

Trading levels is more in line with what we Pipsters use to trade, and for this reason, we must all agree that we are fans of confluence. This is simply meant to be an introduction to the concept, and further study can be found by some of names who’ve touted the approach for years. Constance Brown has written an interesting book on the matter, and for those looking to investigate further, it’s probably a worthwhile start.

Any suggestions for developing this strategy are welcome. Please do offer the community any thoughts you may have through the comments section.

Breakout — Close of Body

The Trading Strategy:

Breakout — Close of Body

Trading Strategy Implementation:

Because there are a ton of breakout approaches out there that are frequently discussed by traders, we are going to try to define the differences of the ones we study by name. In this case, the Close of Body references a horizontal level that we define via candles as the range the market is looking to break out of.

For starters, we need to define an area that is either choppy or congested. In terms of breakout strategies that we Pipsters have employed over the years, the one constant that we discussed when prepping for this page was this:

All breakout strategies that we have considered are built around the idea that the market has bottled, and that there needs to be a release in order for the market to continue breathing.

The simplest way to define a bottling area is to simply look at the relative range of a period and compare it to a collection of other similar periods (in terms of trading range/time.)

For instance, in the image below, you’ll see that two periods are colored. They both contain the same amount of bars, yet one has a dramatically larger range than the other. The yellow area clearly is an area of congestion, and it is in these areas that breakout plays can be considered.

Now we do not mean to put together a full trading system on one page. A trading system involves money management, trade management, risk analysis, etc. This is simply a look at a commonly discussed trading strategy, and hopefully you Forex traders, or traders of any market, really, can come to your own conclusions regarding the value of the strategy.

As for time frame, for this one we decided on a 1 hour chart.

Need it be a 1 hour chart? Not at all. It’s simply a reference point. I personally traded breakouts on a 5 minute charter for nearly half a year.

So, assuming we, as breakout traders, approached this market and saw that the heavy congestion was occurring, we could very simply address this yellow area and set some definite parameters. For one, the market is either going to retrace or continue. It can’t go on in that sort of congestion range forever.

The question is, can we, with any probability, honestly and consistently take on the market and make money with breakouts?

Well, we need to start our investigation, and the ‘close of body’ breakout is as good a place as any. When we say close of body, we mean that the body, not the wick, is the area of most interest to us. And because of this, we look to define our “breakout area” by these very bodies.

In the 2nd image we’ll share, the yellow area is defined with body defined horizontal levels. Assuming we watched this period and range develop in real time, we definitely would have noticed that one large engulfing bar essentially set the range, and that this range is pretty much defined in that bar.

We then, once we’ve captured the range, define areas to enter the market anytime we have an OPEN outside of this range. The Stop Loss is set at the opposite horizontal line. (If it’s a long play, our SL is placed a spread’s distance plus one behind the red line, and vice versa.)

Our third image shows that we actually gapped through the area and ended up with a full bar breakout. Assuming we needed the proof of history to enter, we can make the claim that a reasonable entry took place at 0.8336.

This puts our SL at 0.8290 or thereabout, and forces us to consider our Take Profit, which, as responsible traders, ought to be at least 2 times the distance of our SL. So our TP 280 pips away. This is a LONG TARGET, and carries obvious risk. We’re really looking at a swing trade here, but the issue of swing or intraday is not so much the issue; it’s the matter of defining the breakout strategy.

Strategy Concerns:

In this case the trade definitely would have led to success. But our concerns about catching breakouts (and not fakeouts) has been readily discussed privately by us Pipsters, and we remain in a state of deliberation.

The main concern we Pipsters voiced when discussing this trading strategy during our daily webinar is that we’ve all worked with breakouts, and although they can be tremendously lucrative, they are HARD to trade — particularly on the emotions. Breakouts come with fakeouts, and there is simply no getting around it.

Plus, the breakout always seems to retrace, so money management needs to consider the fact that this is not going to be precision trading. And this matter is an added stress, in the opinion of us Pipsters.

Also, there is the issue of timing. Timing breakouts can be a challenge. The chart we selected (at random… remember, we’re not advising anything here) did offer a nice win, as can be seen below.

The market went as high as 0.8675, so to be honest, there was plenty of room to place a trail and really see some nice returns on the risk.

Conclusion:

We Pipsters have since moved away from the breakout, but the truth is we all are impressed by those who have mastered the approach. In the coming weeks we will be showcasing other breakout strategies, and hopefully these offer you some suggestions for comparison.

Breakout trading is a challenge, but when done right, the risk:reward ratio can be favorable, and quick wins can be had.

Any suggestions for developing this strategy are welcome. Please do offer the community any thoughts you may have through the comments section below.

Correlation — US Dollar Index Trading

The Trading Strategy:

Correlation — US Dollar Index Trading

Trading Strategy Implementation:

Correlation trading, just like all other sorts of trading approaches, comes in variety, and as a result it’s unfair to bulk the approaches as a single system. In order to be fair, we’re going to address one of the more common Forex correlation approaches — that being an effort to monitor US Dollar strength and weakness relative to two majors; and in doing so, look for overall US Dollar strength or weakness. This is a precarious way to trade because Dollar Indexing, as we like to it, can be problematic.

But before we get to some of the concerns we have regarding this approach, let’s begin by discussing the trading strategy itself, and in doing so outline the strategy as we understand it.

For starters, we need to define the chart we are looking at. Because this is what we consider to be an intraday approach, we’ll take a look at the 15 minute charts. These charts will certainly give us an idea of overall correlation (or lack thereof). The Dollar Index is made up of a variety of currencies and their relation to the US Dollar; but for the sake of study, we’re going to focus on the big two:  GBPUSD and EURUSD.

In order to measure US Dollar strength or weakness, we are going to look for parallel movement within a 15 minute bar.

The underlying belief is that the market moves in two general directions… for and against the US Dollar.  (This is not entirely true. There are plenty of occasions where we’ve seen both the USDJPY and the GBPUSD rise during the same session, as will be witnessed when addressing the chart below. But Dollar Index traders will tell you that the method is one where if there is deviation, trading does not take place. )

The main tenet behind this approach is this:

When the pairs do correlate, and strength or weakness in the US Dollar is apparent; it’s as simple as trading in the direction of momentum, and protecting trades with defensive trade management in order to protect equity against sharp reversals.

The overall idea, as presented above, is seemingly sound.

But let’s push a little further as we investigate….

We’re looking for periods where the market correlation between Dollar strength and weakness will lead to a high probability trade. (Remember, high probability trades are all that we can ever hope to achieve. Wasting time searching for an approach that never fails is to simply disregard the market’s ability to be dynamic. A trader looks for high probability setups, and then uses trade management that will give him or her the best long term outlook for consistent earnings without having to jeopardize the account.)

At first look, correlation seems attractive, and then, after further study, perhaps a waste of time. Which leads? And how is one to know when one is being led or simply diverging from the other? (We placed a vertical line on both charts to mark a particular time. This shows that the charts are perfectly lined up.)

Much like an indicator… any indicator… correlation seems to work at times, and fail at others.

So is that it? Do we throw it out the window?

Strategy Concerns:

It’s very obvious that the market is not exactly a place for “works every time like a charm!” If someone has an all-encompassing solution to trading, please let us know. Of course there are thousands of products (particularly trading robots) that can be purchased for a little under $200 that seem to, at least in their advertising copy, claim that the answer can be found in a program.

Two years ago Neural Networks was the fancy term for the “answer” to the market. Today it’s something else, I’m sure. I’ve long lost interest in even following the banter. I guess I can say that we Pipsters have spent enough time with enough professionals to realize a social science like the market can’t be solved. It can only be responsibly managed. And that’s exactly what successful traders do… we manage probability.

Which brings us back to correlation.

Correlation is an aspect of trading that holds obvious value. The approach we are diagramming doesn’t seemingly hold value at first glance, but for those of us with experience with correlation trading, it seemingly must be used with an understanding that the markets do correlate at times, and fail to correlate at others. This can be particular to the day, the week, even the month.

What it can not be is panacea for a technical trader who is unwilling to bother with any of the fundamentals. If watching markets fluctuate, watching them move in and out of parallel movement, then correlation may be for you. If you would rather focus on a single chart and simply measure the movement of a market on a particular day, and trade that day, then trade that day.

Conclusion:

Correlation trading is particularly advanced, and requires a firm understanding of market parallels. This has plenty to do with market dynamics relative to macro econ stuff. For instance, in the above scenario we outlined, the USDJPY had been moving opposite the EURUSD and GBPUSD, but only on a larger time frame. At the time this chart was saved as an image, the 80 to 84 area for the USDJPY looked to be a larger floor that the market had been choppily trading. To think that it will be as simple as pinning one pair to the other, and trading synchronicity fails to look at the larger factors that go into a market. The USDJPY seemed steady against the 81-84 floor, while EURUSD and GBPUSD seemingly moved in tandom.

We will leave you with another look at that same chart, and show you something that we Pipsters find interesting. Instead of looking to the areas where the markets move in tandem, we like to address the areas where they diverge.

On this particular day, the orange area, during what I believe to be the NY session, showed definite divergence in an otherwise relatively correlating day. The price action on the EURUSD during this stretch certainly seemed to hint at the opportunities presented.

Correlation trading is advanced, and requires the mental flexibility to pick up on market changes.

Please comment if there are other aspects of Dollar Index Correlation that you think we ought to consider adding to this page.

Yen Dives Toward Retest of Our Figure

The USDJPY finally seems to be coming around to the forex figure we were discussing a couple days ago. The fact is, the market moves at its own pace, and sometimes we Pipsters have to just hang around until the market comes ’round and makes sense again. Well, sense has appeared again, and we look to be retesting our figure.

The EURUSD rested through Asia, as it apparently did through New York before that… and London before that. That said, we have seen a pretty slow creep toward the 1.3080 figure we were eyeing sometime late last week. As we Pipsters all know, support, when broken, often becomes resistance.

And to close out this pre London setup talk, Cable has decided to show some life and potentially threaten some of the highs from last week. Trends are easier to trade than the chop. This is a Pipster belief, and we’ll continue to wait to see that we’ve really broken from the choppy chop Cable has been in as of the last few weeks.

Stay safe!

EURUSD RETESTS 3080 — Then Explodes

EURUSD Explodes Through All Kinds of Levels

The EURUSD gave us quite the morning wakeup here in the States, as we woke to find that the 3080 level we were watching held, and held mightily. We currently watch as it trades in the 3306 area.

In a bit of curious news, the USDJPY hasn’t reacted much. We did break out 82.72 level, but have since crept back up. If Euro’s move holds, the USDJPY will grow more and more attractive.

Related Posts:

  1. EURUSD Through 3080… We Wait for Retest
  2. EURUSD Eyes 3080 Level

USDJPY Breaks 82.72 As “Promised”

The Yen Gives Us A Gimmie

Earlier today we mentioned the severe weight on the US Dollar that led to the ground giving move against the other two majors — Sterling and the Euro. We held those extended moves, yet hadn’t seen the correlating response in the Yen pairing with the dollar. We Pipsters are not correlation traders all the way, but we certainly keep the relationships in mind… and this one was one we’ve been talking about for some time.

We’re well through and in a “free trade” at this point. Patience, patience, patience.

As for reference of our earlier comments:

Related Posts:

And for good measure…

EURGBP Levels of Interest to Pipsters

We’re including a few new pairs this week in order to better our coverage of the currency markets. We will also push, based on requests, more charts into the web. People, it seems, are as interested in our charts.

Well, you asked for it….

EURGPB Levels of Interest

Related Posts:

AUDUSD Levels of Interest

Another pair we’ve decided to add, the AUDUSD. The Aussie is a favorite of a couple Pipsters, and so we’ve decided to mix it in with the majors. It has had one hell of a run-up, and we’ll see whether the bears can do any damage.

If we get below 9690, we won’t really have much to hold onto until 9520.

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