This is the first post in a series about different tips & tricks that you can add to your trading arsenal.

Today I’ll be talking about Daily moving averages. Moving averages are indicators that display the average price movement. Basically, if the moving average is pointing up, you have an uptrend and if it’s pointing down, you have a downtrend.

There are two main types of moving averages that traders use and those are simple moving averages (SMA) and exponential moving averages (EMA). Most traders apply the averages to the close price. Basically, a 50 day SMA applied on the closing prices works like this: it adds all the closing prices for the last 50 days and divides them by 50, obtaining an average closing price for that 50 day period. For each 50 day period, it plots a line on your chart between the previous 50 day average closing price and the current one. The EMA works the same way, just that it adds more weight to the more recent days, so it’s less lagging than an SMA. Take a look at the chart below, as we’ll be using this one for our explanations. The blue line on the chart is the 50 day EMA:

50, 100, 260 D1 EMA's

As you can see, the 50 day blue EMA provided excellent points of support lately, in this bullish EURUSD rally. I always watch this EMA and when price reaches it, I look on a lower timeframe to find a good entry in the direction of the trend.

The other EMA’s I suggest you should be adding to your charts are the 100 and 260 day EMA’s. The dark khaki line is the 100 day EMA and the orange line is the 260 day EMA. These also provide good support/resistance levels once the 50 day EMA is broken, especially the 260 day EMA, which is very important, since 260 is roughly the number of trading days in a year, so that means it’s a 1 year EMA.

Besides using these as support/resistance, you can also use them to gauge the medium and long term market trends. Basically, when the price is above one of these EMA’s and that EMA is pointing upwards, you are in an uptrend. When price is below and the EMA angle is pointing down, you’re in a downtrend. When the EMA is (or almost is) horizontal, you’re in a sideway trend (ranging market). I consider the 50 day EMA shows me the medium term and the other two I use for the long term view. Right now, EURUSD is in an uptrend.

I’ve been training myself at a brokerage firm for 6 weeks so far. Actually, it was more a “testing period” than a training course. In all this time, I only had to follow two rules:

A. Fixed profit/loss targets: GBPUSD 55 pips, EURJPY 60 pips, EURUSD 45 pips. I just set stops and take profit orders and wait. I am not allowed to close a trade before it gets to the stop or the take profit level.

B. 3 minute rule: When I first open up the platform, I have 3 minutes to open a trade on each of the three pairs I’m trading. After I close one trade, I have 3 minutes to take another one on the same pair.

Why these rules?

Well, they haven’t told us explicitly, but I figured out what the reasons are.

A. Having fixed targets makes you get rid of the two killer-emotions: fear and greed.

A fixed stop eliminates the fear of losing a trade. Many noobs close out their trades in fear when the trade is 5 or 10 pips in loss. After they do that, most of the time the trade returns in favour of their position and then they get frustrated. They’ve closed too early, without giving a chance to that trade. This also eliminates greed. Many times, noobs don’t even set a stop loss order or widen it as the trade is turning into a loser, thinking it will go back in profit. I did that in the past, being driven by my emotions, sometimes even closing trades at -120 pips. This rule forces you to cut losses short and at the same time to give space to your trades.

B. The 3 minute rule eliminates the fear to jump into new opportunities in the market. You’re no longer afraid to enter into a position. You are always prepared, no matter what the market is doing. You will also learn to forecast market movements all day with pretty good accuracy in a few months. Screentime is very impotant and that’s your greatest teacher. As a friend said: “You have to be in it to win it”. Meaning that if you want to make profits, you have to take the risks, you can’t win anything if you don’t take the opportunities that the market has to offer. Many times in the past, I thought “I should go short here, at this resistance level”, but I couldn’t pull the trigger. In 30 minutes, price was already over 50 pips lower and I was cursing myself for not entering the trade.

The truth is that emotional control is 90% of your success as a trader. If you don’t learn self-control, you will never make it. You will just provide money to those who do…

Tips and tricks that make the difference

A. Trend analysis

Trend analysis is one of the most important parts of technical analysis. The more able you are to gauge the trend and market sentiment, the more you will be able to collect a big chunk of pips each day.

An uptrending or bullish market is a market that makes higher highs and higher lows:

Uptrend

A downtrend is an “upside-down uptrend”, meaning the market is making lower highs and lower lows.

Identifying a trend

As a short-term trader I always have to be alert, know what the current trend is and watch out for trend reversals. I’m only interested in short-term H1 (1 hour) trends. An H1 uptrend can be just a correction in an H4 chart, but that doesn’t matter for me, since trading based on the H1 chart allows me to meet my profit targets easily. Such short-term trends can change dramatically, especially on important news reports. That’s why you need to learn how to become a market chameleon and adapt fast to changes in the market.

Downtrend changing into an uptrend

Above is a picture of what a trend reversal usually looks like in a downtrend. The lower lows in a downtrend act as resistance levels as price goes further down. When the price actually breaks through one of those lows, then that broken low becomes a support level and a new trend (or possibly just a bigger correction) is starting. That’s our signal to stop shorting the market and buy at support. Also, reversals tend to happen at 61.8 or 76.4% Fibonacci levels of a bigger wave that the trend is part of. 76.4% Fib is an overbought signal in a downtrend or oversold signal in an uptrend.

You can also plot an 8 hour and 21 hour EMA (exponential moving average) on your chart. These will signal a trend reversal when they cross. When the 8 hour EMA crosses the 21 hour EMA from above, a downtrend is begining. When it’s crossing the 21 hour EMA from below, an uptrend is begining.

Learning how to identify trends and how to use support and resistance levels is the key to Forex. I’m starting to dump Fibonacci and pivoit points, because I find them to be much less reliable than support/resistance levels that I draw myself on the chart. Anyway, if you do want to use some tool, I suggest dumping pivots and sticking to Fibonacci. Pivot points are calculated using daily highs/open/close data and that can be different for different brokers (a daily bar can have dramatically different open and close prices).

Cheers!