That Scalping Trick I Mentioned

Ok, I don’t have a picture, but you can get the idea from a description. This is what you do:

Go to your chart (any time frame, but for scalping I use 1M & 5M) set an SMA14 (or other favorite period).

Set another MA, but EMA this time. Change the line type or color as visual aid.

When the bars have traveled over (or under) both right about the time the MA’s crossed AND the bars are not hitting the MA’s AND there is a noticeable gap between the MA’s, you draw a trendline.

Draw this trendline starting about where the MA’s cross, and roughly bisect the gap. Follow the chart and gauge the gap.

When the price breaks the trendline, place your trade. Follow it to whatever feels comfortable. This more of a price-action following and revert-to-normal type of trading. Really, I’m just following the price as it swings back to get in balance.

Here’s some pictures (I changed my mind), you’ll see:

Chart 1Chart 2

It works better when the price is swinging away from both MA’s, and has to whip back on the curvature it drew on the chart. This could also be a momentum-type of trade. I don’t really care, because a) it works, and b) it follows the price rhythm. The diagonal trendline is dynamic from time to time, so there are no worrys about psychological price levels, etc.

This was on a 5-minute chart, at about 4 in the morning, London, so it was slow. That break was worth about 3.5 pips. Not much, but for this time of night, for finding that setup, it’s just fine. By the way, the next bar continued up, and made a total of at least 8, although I would have been happy with 4. Hey, free money!

Oh, and a great piece of advice that took me a long time to accept: Wait For The Setup!

What Moving Average Should I Use?

Traders, like most people, start learning the basics, then go forth with that knowledge. There is a statement floating about (I don’t know the source, probably no one does) that states, “95% of [Forex] traders lose money.” I don’t think that is true, because “lose money” is not defined. Yes, a net loss is a loss, but what if it is only by a few percent of the total account? I believe most people take that statement to mean: “My account got blown in the first few months!”

Anyway, many of these “losing” traders use moving averages. They are actually useful, more so than as a price indicator, because they also graph behavior. More in a minute. A basic way of using this is to use an Exponential or Weighted average (they place more emphasis of closer price fluctuations) and overlay it with a Simple average. The general trend – no guarantees here! – will be up when the EMA/WMA line is over the SMA, and vice versa. This is typical, but the MA periods are up to you, the chart master, to determine.

TIP: Those of you who study behavior & odds (like I do) will notice that when the (2) MA lines (as referenced above) cross each other, if that crossing is treated as a failure for not following in the same direction, you might be able to make some pips. I have a trick that I can share later, to illustrate. Can you find the behavior preceeding any cross?

I have noticed that longer periods are better at signaling crosses, as well as changes in the chart timeframes as related to sharpness of the crossing angles. The sharper, the stronger the cross will continue through without wavering. One thing that should be considered when using moving averages is if they follow the same pattern on related timeframes. Correlation still is useful, even here.

A sample chart.

Here is a sample chart. Colors are often used to help differentiate between data types. The green bars, or Candlesticks, are up. This means the starting price, or Open, is lower than the ending price, or Close. The red bars are the opposite. Black is often used for Up bars, white for Down bars. I use a black background, so contrasting colors work better for me. The bars’ style can be change to the typical “stock market” look, or to any number of graphics and colors. I prefer candlesticks.

They curvy lines are Moving Averages, or MA for short. The shorter the average price, or Period, they track, the closer they hug the bars. Some people determine trends by noticing if the bars are above or below the MA lines, and for how long they maintain their relative position. These particular lines are drawn based upon the closing prices, using a simple averaging of the price, or Simple Moving Average (SMA). You can change the curvature based upon closing, opening, mid-point pricing, as well as how the price is averaged (weighted, HLC/2, etc.). The lines can be shifted in time forwards or backwards, too. It depends on what you want to see and do. More on that later.

Without even knowing the what market this is, or the price of the underlying market, can’t you tell that it: 1) went lower in the first half of the chart, and 2) started going up? In reality, this is the Euro/US dollar pair in Forex. It did continue going up later during the day. The dashed white line indicates a new day. In this case, it is 00:00 GMT, or 4 hours ahead of New York, USA. I’m not showing you how to predict market behavior, just that sometimes intuition is all it really takes to work the market. That, and risk management.