Hello Traders! In this week’s Lessons From the Pros article I’d like to explain a couple of tools that I call my “trading assistants” which help me filter out some of the lower quality trades that many of the novice traders out there take.
In numerous newsletters, we have discussed choosing the high quality levels of supply and demand to position ourselves to take the higher probability, higher reward, and lower risk trades. Some of the odds enhancers discussed here and in our Online Trading Academy classrooms are the departure from the level, arrival to the level, reward to risk ratio, etc. This week I would like to add in a combination of two very popular indicators to help us with our trade selection.
A couple of notes before we begin – no indicator or combination of indicators works every time. What do successful traders do when a trade isn’t doing what they planned? They take the small loss – always! Another note is the fact that many new traders try to use too many of these indicators on their chart. While one or two can be very helpful, having five or six or seven or more will cause us to take very few trades, if any. Here are my preferred steps to choose my trades:
- Find a pair that is currently trending in a bigger time frame, for example a 60-minute chart
- Identify high-quality supply and demand zones on the time frame chart
- Look for a reversal on a smaller time frame chart to “time my entry” in one of those supply/demand zones
- Manage the trade if it goes my direction, exit for a small loss if it goes against my analysis
So what trading assistants should you use? That is the million dollar question! In our Online Trading Academy classes, I like to say that we are presenting a “buffet” of trading options. When you go to a food buffet, what do you do? I take a little bit of everything that looks appetizing, then go back to my table to try them all. On my next trip to the buffet , I take a bit more of the food items I liked the best, and maybe try a few more things. Next trip, same idea. After a time I know what I like and what I don’t. Trading is the same way! There are many traders who like MACD or Stochastics or RSI or CCI or certain moving averages, etc. Why do successful traders use the same indicators over and over again? Hopefully because those indicators help them make money. They have found the combination of indicators at the buffet that they keep going back to. This is one of the challenges of trading, finding the “right” ones for you.
On the following EURUSD 60 minute chart I have applied the 200 period exponential moving average and the Commodity Channel Index, or CCI. My general rules for entry are as follows:
- Trade in the direction of the 200 period EMA
- Look for entries in a high quality supply/demand zone
- Watch the CCI for divergence from price to give me a heads-up that we are possibly getting ready to change direction
This chart gave me several reasons to take trades at BOTH blue arrows. The first blue arrow had price rapidly approach a decent level of demand – however, that level also had an intersection of the moving average which will often act as a minor demand level when in an uptrend. In addition, the CCI was showing a bullish divergence when compared to price. The CCI was trending up from oversold territory as price was trending down to the demand zone.
Looking at my smaller time frame chart, in this case the 15 minute, the moving average is removed as I will trend trade from the larger time frame. If the moving average is on both time frames I get confused. On this chart I am again looking for divergences, overbought/oversold, and finally a possible candlestick pattern to enter the trade.
At the blue arrow marked “First” you can see another bullish divergence on the CCI while it is leaving oversold territory, PLUS the beginning of a possible double bottom pattern, plus a vague bullish Harami. At the blue arrow marked “Second,” nearly the exact same reasons were apparent – bullish divergence, oversold, bullish Harami at the lower low.
While this approach may seem too simplistic to some, and too complex to others, it is a nice little strategy that I look for whenever I trade. If you “need” your trading to be more or less complex than this, look to other instructors in both our Online Trading Academy classes, or even in our Extended Learning Track rooms. All of our instructors have gone to the trading “buffet” and found the combination that works for them. It is your responsibility as a student to figure out what works best for you. Always remember that there are only two things that successful traders have in common. If the trade goes the wrong way, we get out. If it goes our direction, we let it keep going! By using a trading assistant or two, you can get a more precise entry to hopefully trade with the trend, thereby giving us higher probability, higher quality trades.
Until next time,