Hello traders! This week’s article may cause a lot of controversy, because of the possible mis-application of the trading rules that we preach at Online Trading Academy. As a reminder, we look to short in supply zones in downtrends, and go long in demand zones in uptrends. Easy enough, right? Theoretically, yes. The main question is “which time frame trend are you using to determine direction?” This week’s lesson is specifically applied to you day traders out there.
First off let’s define a day trader. In the stock market it is someone who enters and exits the trade in the same trading day-buying 1,000 shares of XYX in the morning and selling those 1,000 shares in the afternoon, for example. In the spot Forex market, the trading “day” isn’t as clearly defined. For this lesson, we will assume you are looking to be in a trade for a few minutes to a few hours and trading off of a 15 minute chart.
Next we have to define what a moving average is and why we would use it. Investopedia defines a moving average as “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.” Most of you have probably used a moving average or two in your trading-they have been around forever, hence the “ancient trading technique” reference from the header of this article. In my own trading plan I have a few strategies/techniques that I use to enter and exit trades as I’m sure you do as well. I am personally using several moving averages from the daily and weekly charts on my currency pairs and applying those figures to my fifteen minute intra-day chart for a short-term (almost scalping!) trade style. Why? Because major money movers like hedge funds, multi-national corporations, banks (the institutions we talk about so often) are using them for direction and entry. If price pulls back to a moving average, many big money players will use that retracement to re-engage in a longer term trend. However, I am a shorter term player! Knowing that these institutions will be scaling into a trade as price is hanging around a moving average gives me a chance to join them for at least a few little pips to add to my account.
So which moving averages should you use? Well, the possibilities are endless, but here is what I personally use: 50, 100, 200 simple moving averages and 50, 100, 200 exponential moving averages from BOTH the daily and weekly charts. Yes, there are six wiggly lines on both charts, for a total of twelve possible levels to mark! For example:
Notice how price action seemed to “respect” or bounce off the particular moving averages over time. This shows the power of the institutions and their use of the wiggly lines. If we could just harness the power of those darn institutions for our day trading! Here is how you can do that. I mark the location of these daily and weekly moving averages on my fifteen minute chart, and use the intersection of pure supply and demand zones with them to short term intra-day trade. On this following fifteen minute chart, only the daily 200 exponential moving average is marked for clarity’s sake, but on my own charts I will mark the location of whatever averages are within a couple of hundred pips of the current price.
Notice how the fifteen minute chart came right down to the 200 day moving average marked in pink, and bounced off of that level? Of course, it was an intersection of a previous supply/demand zone, but this odds enhancer certainly helped me choose the correct demand zone to go long in! You can see on the daily chart that we hit the 200 day simple moving average just a few hours later-nice move!
Look to the next day, the shooting star candle. Wonder why it chose to stop right there? Take a look at the weekly chart above. That would be the 50 week exponential moving average stopping our GBPUSD dead in its tracks. Looking to the left there isn’t a clear supply zone that would indicate that this pair would stop at the 1.5990 level on either the daily or weekly chart-but that darn moving average stopped the price from going any higher!
At the red arrow marked 1, you may not have noticed a clean supply zone-just the moving average on the larger time frame. At the red arrow marked 2, the previous supply zone should be very obvious, and with the moving average hanging there you had an opportunity to sell short. Notice that eventually, those big money institutions did push the GBPUSD down over 100 pips in just a few more hours, and then much more later. Nice odds enhancer!
Here is the bottom line: mark a few of these MA’s on your intra-day charts, and look for clean supply and demand zone intersections for your intra-day trades. They don’t show up every day, but when they do, it can be very powerful. Notice I’m not using these MA’s for trend trading-they are an odds enhancer for specific supply and demand zones and can help with entries and even exits on my smaller time frame trades. Try this on the demo account for a few trades to get the hang of it, then let me know how you do!
Until next time, trade well!