January 2013 was a very interesting trading month for me; I learnt more in that month, than all my months of trading combined. I learnt to SEE the trend. This might seem funny to a lot of traders, because most traders open their charts and can tell easily if the market is bullish or not. The essence of this article is to share my trading setup and some trading tips which have helped me become a better trader.
Before I begin, there are some basic trading principles which we must consider.
The markets trend and they can trend for several weeks or months.
The best place to enter a trade is after a trend has been confirmed; this would probably mean placing trades in the “middle” of a trend.
When the trend is up, we buy dips and when the trend is down we sell rallies.
The Golden Cross is a very popular trading concept used for generating trading signals. The signals are generated when a short-term Moving Average (MA) crosses over or under a long-term Moving Average. Bullish signals are created when the short-term MA crosses over the long-term MA, while we get bearish signals when the short-term MA crosses below a long-term MA.
An example can be seen below; a cross between the 5-day Exponential Moving Average (EMA) and 20-day EMA.
It looks so simple, it is almost hard to believe anyone can make money trading in such an easy fashion.
“To make money, you need to have an edge and employ good money management. Good money management alone isn't going to increase your edge at all. If your system isn't any good, you're still going to lose money.”…Monroe Trout
A lot of traders shy away from moving averages; there are a lot of complains about how MAs lag and can be very unreliable in a choppy or ranging market.
These are very valid points, but MAs also give invaluable information about the current market trend.
My Golden cross setup employs two Moving Averages: the 20-day EMA (my personal favorite) and the 200-day EMA.
The 200-day EMA gives me a general idea of the long-term market trend,while the 20-day EMA helps me plan my exits and re-entries. The 200-day EMA is the backbone behind this setup, because it makes sure my trades conform to the current trend direction.
Below is an example of the 200-day EMA applied on the EURUSD one-hour chart.
This isn't just another cross-over setup. The principle behind using the 200-day EMA is to stay on the side of the trend as often as possible. This also gives my trades a higher chance of being profitable in the long run. Quoting a well-respected trader, “Most currencies really only change direction a handful of times a year you just need to give yourself the room to stay with a price trend”.
Trading isn't an exact science and I always remind myself that my analysis could be wrong, irrespective of the indicators I employ. To make matters more interesting, and following Sir Monroe’s advice, I added my secret sauce to the mix; I added the Time Segmented Volume (TVS) indicator. In my opinion, this is an invaluable addition to any trading arsenal.
COOKING THE SOUP
My trading setup uses three indicators; the 20-day EMA, 200-day EMA and 24-Time Period TVS. All indicators are applied to the one-hour chart.
Long trade conditions:
- Buy when the hourly candle closes above the 200-day EMA
- The 20-day EMA is pointing upwards and below price
- The TVS indicator is above the zero line
An example can be seen below.
Short trade conditions:
It is exactly the reverse of the long trade conditions, I open short trades when:
- The hourly candle closes below the 200-day EMA
- The 20-day EMA is pointing downwards
- The TVS indicator is below the zero line
Below is a screenshot showing a short signal example.
A not so perfect signal.
I do not believe mechanical systems should be followed blindly, a lot is still left to our discretion. This setup works well on most currency pairs, but please be informed that this is by no means the Holy Grail. It is just a practical approach to trading using Moving Averages and the TVS.
This is a topic that most traders have read about in depth, and in all honesty there is not much that I could add. The fundamental principle behind money management is never to over-leverage. The best way to look at money management is to assume you have a string of 30 losing trades.
30 losing trades in a row obviously mean something is seriously wrong with the trading strategy. But if after 30 losses, the trading account goes bust; then too much leverage is been used on the account. A better approach is to minimize losses as much as possible. Our trading success or failure should not be based on one trade; it should be based on multiple trades. A wrong trading decision should not account for our total loss of equity.
Once a trade goes bad, get out!
There’s nothing wrong with running away to fight another day.
But when we catch that trend and start counting profitable pips, there should be no hurry to get out. When I have a long trade open and price closes below the 20-day EMA, it is usually a signal to exit that trade.
THE USDJPY AND HER COUSINS
Since I am sharing helpful tips,I think I should share my views on the yen pairs. I really enjoy trading the yen pairs; they are very volatile and can yield a fair amount of pips within a very short time frame. But they can also be a nasty drain if you are caught on the wrong side of the trend. For the yen pairs, I use the USDJPY as my compass for navigation.
With the USDJPY as a reference, you rarely go wrong with the other yen pairs.
If the USDJPY is bearish, there is a strong tendency for the other yen pairs to be bearish too.
We can see below how similar their movements are.
A good way to read the yen pairs is to watch the USDJPY. I realize there are a lot of trader contest participants in the Dukascopy community, and every now and then I see traders going long on the yen pairs while the USDJPY is dropping. I've made that mistake several times, and I know better. I guess the relationship between the USDJPY and the other yen pairs revolve around the strength of the yen currency, but whatever the case, I recommend buying the yen pairs when the USDJPY is up, and selling when the USDJPY is down.
"A successful trader is rational, analytical, able to control emotions, practical and profit-oriented"..Monroe Trout
Our trades should be ones we can defend with good reasons. Last month, during the trader contest, i went long while the yen pairs were all dropping. It was a very irrational entry, and i lost pretty much all the profit i had made during the month. The trend is our friend. I hope this article has been helpful. Comments and observations are appreciated.