If you have been a regular reader of any of these Lessons from the Pros articles, you will without a doubt know that the education provided by Online Trading Academy is based around a consistent, rules-based strategy. We teach our students how to recognize low-risk and high-potential reward trades in the financial markets, all of which are based on the key principles of Supply and Demand. The opportunities which we look for to buy and sell currencies and other assets are simply highlighted by price and price alone. Any other tool which a trader uses to identify a speculative opportunity, such as a technical indicator or a traditional price pattern, is nothing more than an “after the event” signal. What I specifically mean by this is that and pattern or indicator requires an actual behavior by price before a valid signal can be generated to by or sell. This fact alone tells us therefore that any signal to buy or sell which is given to a market speculator is lagging in nature if it does not come from the price itself.
When a trader fully understands this fact, they can then learn to take only objective buying and selling signals for their trades, such as using Demand and Supply zones for their entries and exits, much like our most successful students of Online Trading Academy choose to do. This lack of reliance alone offers the astute and disciplined trader, a very distinct edge in the markets because they will always find themselves in the powerful position of being one of the very first to buy and sell at any given time, thus giving them the greatest overall risk to potential reward ratio. Anytime a trader waits for confirmation to pull the trigger and enter a trade, they will be buying after a rally or selling after a fall in actual prices, meaning then that their risk has increased and their potential reward has decreased. For this very reason alone, the core strategy we teach is strict in its rules of defining entry and exit and always offers the student the safest way to enter the market at any time.
However, I would also like to state that we do not pour scorn on technical indicators and chart patterns when they are used in the correct way. The problem is mainly that most traders have been taught to use theses conventional trading methods as decision-making tools. The only way to use a technical indicator or chart pattern in a low risk way is to use them in conjunction with a solid rule-based strategy as nothing more than a decision-support tool to increase our odds for success on the trade. Now with so many different tools out there, you could ask me what is the best one to use but this comes down to personal preference of the trader. In this instance though, I would like to highlight one of the most simple and popular of them all: The Moving Average (MA). If used in the right way, the MA is perhaps one of the most well rounded and dynamic tools we can incorporate into our trading, with around half a dozen uses to assist a trader in various aspects of their trades and positions.
The classic definition of the Moving Average is this:
“An indicator frequently used in technical analysis showing the average value of a security’s price over a set period. Moving averages are generally used to measure momentum and define areas of possible support and resistance.”
One of the most popular methods in using a MA is as the definition states: a possible support or resistance area, yet before a trader can employ this method, they need to then define which time period they will use for taking signals from the MA. In this example let’s use one the most standard settings, which is the 50 period MA as shown below:
From the above example we notice that our definition of the MA as a support or resistance area is proven to be true on multiple occasions. There were some trades that worked out very well and of course others which did not. This is the name of the game. The key to consistency is in how you use your tools and how you manage your risk after all. Now while the 50 period MA is one of the most popular data points to use, you will often hear about how you should use another number which has better results than others. Let’s take the 31 period MA for a test drive next:
In this case, we can see that there were a few opportunities which were similar to using the 50 MA but either not as accurate or maybe a little more accurate, depending on the trade taken. So which is better then: the 50 or the 31 period MA? Well before we answer that, let us take a look at just one more example, this one being the 78 period MA:
Well in this example the shorts at MA resistance were not as solid but the buys at support were very accurate and gave some very strong moves. So the next question is which of all three do we choose to use? The objective answer is that it is up to you! By now you should have realized that it is completely irrelevant as to which MA is the better one, as they all will work as price support and resistance at some point in time because price will always return to its average over time, no matter how long or short that period of time actually is.
The trader who understands this will always remain more objective in their speculations because they will be using more than a Moving Average to make their trade decisions and take their setups. They will be using price above all else and supporting the trades with tools, rules and risk management practices which suit them individually, not because or what they have read, seen or been told but rather because of what they objectively understand and recognize in price itself.
Have a great week and Happy Thanksgiving.