Trend following can be done in several there are ways, but in this video I am looking at the exponential moving average. The difference between the exponential moving average and a simple moving average is that the exponential moving average puts more emphasis on the most recent candles. So for example, if you have a 50 day moving average, the 50-day exponential version of that moving average calculates the most recent candles as much more important than the first few. In other words, and gives you an idea of momentum shifting rather quickly. On the chart, you can see that the 50 day exponential moving average has been offering a bit of dynamic resistance as of late, so traders would expect sellers to come in every time we approach this moving average. Also, you can clearly see that the moving averages moving downward, which of course indicates a negative trend. By using this moving average, the trader would then be able to place trades in the direction of the larger trend in general. Typically, this is the best way to make money in the markets as you are not finding the market but rather letting it work for you. In reality, there isn’t a huge difference between a simple moving average in an exponential moving average though, because quite frankly the calculation isn’t dramatically different on larger timeframe. However, a shorter-term chart you can often see a significant difference as the moving averages will be reacting much quicker.
Quite often, traders will look for a sign of momentum to get involved in a market. And engulfing candle signifies that traders have made up their mind as to which direction the market should go, and this system tries to jump on that move and continue to go in the same direction. On the attached USD/JPY pair, you can see that the recent high on the daily chart had a bearish engulfing candle. The engulfing candle is simply a candle that is both higher and lower than the previous candle. In this case, it was a very bearish candle, and that means that downward pressure was mounting. By selling at the break of the candle, you are taking advantage of a reversal of overall momentum. Quite often, people will play stop losses on the other side of the engulfing candle, as if we turned around to break above the top of it, that would be a very significant swing in momentum back to the initial move. However, if we continue to break down from there, the trader needs to look for at least the same size move in profit as they were willing to risk. Quite often, you can get much more. The currency markets are about trading with the overall momentum, and by attention to engulfing candles, you can see when everything is changing very rapidly, and take advantage of that momentum to increase your profitability. It should be noted that this method it tends to work better when used with support and resistance as well, giving you a secondary reason to be involved in the trade. In this particular case, the engulfing candle on the daily chart formed a bit of a “double top.”
In this video, I’m looking at breakouts using moving averages and Bollinger Bands. In the first chart, I have a 200 day exponential moving average placed upon the GBP/NZD daily chart. You can see clearly that we broke through the 200 day exponential moving average to the downside in December 2015. Recently, we have seen the pair test the bottom of the 200 day exponential moving average and fall. So in this example, you can see where we had an actual break out to the downside as we jumped on the other side of the exponential moving average. It was offering support previously, and then we broke through it. Later, you can see where we did not manage to break out and above the exponential moving average, and that shows that the negativity is still very much a part of this market. In the AUD/JPY one-hour chart, you can see that I have the Bollinger Bands printed on the chart. Notice that the spread of the indicator was very tight, and then we shot straight through the roof and above the overbought indicator. While this typically means that you are looking to sell, when the Bollinger bands are very tight it means that volatility has all but died. Sooner or later inertia will kick in and we have to move in one direction or the other. So having said that, once we broke out to the upside it shows that the buyers are starting to take control. Later on, we ended up falling back to and eventually through the mean (middle line) of the Bollinger Bands, and it means that the explosive move to the upside was indeed over. While these are 2 totally different techniques, they both are used quite extensively by the trading community. Because of this, you should be aware of these potential tools that are available to you.
The Relative Strength Index indicator and trendline combination makes for a nice trading system. The RSI measures the overall strength of the market, and has 2 major levels, the 70 and the 30. Above the 70 level shows a very strong bullish momentum, while a move below the 30 shows an extreme bearish momentum. When used with trendlines, this can give you an idea as to when a trade could be placed. For example, on the USD/JPY chart, weekly time frame we have a nice uptrend line that is accompanied by a strong reading in the RSI. However, before the trendline was broken to the downside, the RSI slipped underneath the 70 handle. By doing so, this suggests that perhaps the market is starting to run out of strength, and thereby fired off a sell signal. You can see that the market fell initially, and then tested the trendline for resistance. As that held, the market fell rather significantly.
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