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.

EURUSD Weekly chart for 3-7 august 2009

EURUSD Daily chart for 3-7 august 2009

EURUSD H4 chart for 3-7 august 2009

EURUSD H1 chart for 3-7 august 2009

From the Weekly chart, we see a nice bearish Gartley pattern. As long as 1.4362 holds, I’m keeping a bearish bias and the bearish Gartley pattern stands.

From a daily perspective, I will be waiting for the price to trade below the 50 day moving average, which it has been respecting as a support level since 29th april 2009. A break below this EMA (below 1.4000) would confirm my bearish view.

From an H4 perspective, price looks overbought and a break below 1.4185 ( 50% Monthly Fib) would have me taking shorts with tight stops.

The H1 chart looks good for shorts, all the way down to 1.4085, which looks like a good level for a 45 pip long scalp.

Overall, the market sentiment, from a technical point of view, looks bearish next week.

EURUSD

EURUSD Monthly chart

EURUSD Weekly chart, 23 july 2009

EURUSD Daily chart, 23 july 2009

EURUSD H4 chart, 23 july 2009

EURUSD H1 chart, 23 july 2009

On the monthly chart, the EURO is just above a monthly 23.6% Fibonacci level. A close above 1.42 at the end of the month might keep the EURO rising higher, towards 1.47. The Weekly chart displays a trendline resistance and a supply area at 1.4330 – 1.4360. A break above that would be a confirmation that the uptrend will continue towards 1.47, but I personally favour a fade back down.

On the medium term, we have a daily TL (trendline) resistance in confluence with 1.4331 resistance level, which should provide a nice fade when it gets there. A break under 1.4155 (23.6% daily Fib level) would be a confirmation that the pair will trade lower towards 1.3800 (the bottom of a big daily range).

The 4 hour chart looks quite choppy, showing that bulls are losing strength and there is a lot of indecision in the market. A break below 1.4200 H4 23.6% Fib level and TL support will give confirmation that the bears are in control.

In the 1 hour chart, we’re still trending up, but we’re now inside a nice ranging channel. Price could not stay above the range and it continues to get sucked in, giving signals of reversal. A break below 1.4180 could be a good signal to short the market. 1.4145 is also a critical level though and that will be our final confirmation that the market is reversing and I would go short with tight stops until 1.4145 gets broken.

Overall, I am bearish on EURUSD in the following days and the following week, considering the pair is highly overbought and has made significant rallies. A correction is certainly due. As a trader, though, you need to be prepared for any possibility, so with a break above 1.4250 and if the price starts using it as support, I would go long.

GBPUSD Weekly Elliot Wave analysis

GBPUSD is currently in a wave 3 or wave 5 of a long-term corrective wave C. We probably are at the begining of a wave 5 of that C corrective wave. So, for next week, I am projecting a bullish run up to 1.68 (161.8 fib extension of the last correction) and then the continuation of the big bearish trend, that will eventually take us below 1.35. If we’re in a wave 3 of C (though not likely), we may get a bigger bullish rally before we go down again (maybe up to 1.7320).

Taking into account that EURUSD has a strong correlation with both GBPUSD and EURJPY, we should expect the same iminent bearish continuation for both. But, as I said, next week we will probably witness a final bull rally, so I’m bullish on these pairs next week. If this is the case, then EURUSD may have a top near 1.4719 high of December 18th, 2008. So I expect a break of 1.4330 to the upside on the EURO and a break of 1.666 on the GBP. A possible top on EURJPY would most probably be 145.46 and I’d expect a break of the 139.21 high.

These highs could be taken out tuesday or wednesday, as we have a lot of important news coming out. So watch out for this and good luck!

Lately I’ve been using Bollinger Bands to confirm my supply/demand trades and found them to be pretty efficient. Bollinger bands give you, in my opinion, both the power of an oscillator and that of a moving average. They let you gauge the trend and also tell you when a market is overbought or oversold.

A market is trending up (bullish) if price is moving between the upper and the median bands.

A market is trending down (bearish) if price is moving between the median and the lower bands.

A market is overbought if price is piercing the upper band.

A market is oversold if price is piercing the lower band.

These clues, however, are not entry signals. They are only used to confirm the strength of S/R zones. Let’s take a look at one of the three trades I just made a few minutes ago, which are currently at +75 pips, but should bring me 160 pips if they go well

Long GBPUSD

Reasons for going long were:

- price was rejected from 1.6517, which is near 1.65 (a good demand level and also a round number);

- price was rejected from the middle band, while it was trending up (trading between the upper and the middle band);

- inverted bullish hammer showing reversal signs;

I find that taking trades like these (with good confirmation) adds up to your win ratio pretty good.