SOME WORDS ABOUT THE TREND

I believe that everybody heard such a saying as “the trend is my friend”. Many of us also had met in Internet and books different opinions as to the sence of this saying.

Well, what is the real meaning of it afterall?

The real meaning and idea of the saying is a simple and clear demand: Trade in the direction of the trend and ignore trading signals directed against the current trend.

Friendly trend would remain friendly, while trader treats him like a friend , not doing something against the desire and will of the his friend/trend. Do you know friends who would not be disturbed by your doings against their desire, understanding and will ? Nobody likes such things.

But nevertheless, many of us starting examining charts absolutely forget this simple and clear rule and start trying to catch the high or low peaks or to trade against the trend.  This means, that the trader lacks main thing - dicipline. It is interesting, that the looser, while considering and investigating his own mistakes, often even does not see his main mistake - trading against the trend.

How the trend could be defined ? Very simple - with the help of combination of four Simple Moving Averages (MA). For example, let us take combination  of 5/20/40/60 МА.

Usually current trend is defined by looking at Daily chart and this is right. But the traders with small cash amounts may define trend at 4-hour chart and 1-hour chart. It often happens that in the interests of relatively quick trading the trend may be defined using only 1-hour chart. But we should not forget about the Daily chart, because if the hourly signal coincides with the daily trend, then there appears a brilliant possibility for a mighty movement along the trend.

But let us return to the above mentioned combination of MAs. So, if МА 40 is above МА60, then the trend is upward and each time when MA5 crosses MA20 upward (that is in compliance with the trend direction), we enter the market. But when MA5 crosses MA20 downward, we use this signal only for closing of previously opened positions.

And vice versa, if МА40 is under МА60, then the trend is downward and now we enter the market only when MA5 crosses MA20 downward, and we use upward crosses of MA5 and MA20 only for closing opened earlier positions.

The red dots at the above chart denote the crosses of MA40 and MA60. Blue and red lines show the places for openeing positions in the trend direction.

I know traders, who, in the situation alike trying to  catch the price peak, opened SELL positions near the blue lines. If the trader opens positions without minimum analysis at least for definition of the current trend, then he would better go to casino, where one can always trying to guess right, but never can make a prognosis. There exists an opinion that MAs are lagging behind as an indicator. It’s true, sometimes, but as a trend indicator, they are very good.

Here МА5 - green, МА20 – red.  Red dot - place of closing position ( MA5 crosses MA20 downward). Blue dot - place of opening position in the trend direction (MA5 crosses MA20 upwards ).

We have the same at this chart - red dots - places of closing positions, blue dot - place of opening position in the direction of the current trend.

But WHERE should we place a stop-loss ?

If we enter the market just after the cross of M40 and MA60, then the best place for stop would be 2-4 pips (points) beyond the closest peak directed opposite to our market entrance direction. If you agree, of course, with the size of the stop-loss, or if your collateral permits such stop. But if we opened position some time after MA40 and MA60 had been crossed, then the best place would be 2-4 pips beyond MA60, then, a bit worse, but still ok, beyond MA40 and the weakest variant is beyond MA20.

It’s only natural that the combinations of meanings for MAs could be whatever the trader would like, cause nobody can prevent him for experiments. Here are some examples of four simple MA combinations : 10/20/60/80 or 8/12/24/48 or you may even use Fibonacci numbers like 8/13/34/55 or 13/21/55/89 etc.

The main idea in the combination of four MA is that the pair with big numbers defines the existence of the current trend and the pair with small numbers permits us to effect relatively quick trades.

Here is one more example of trading with the trend. Upward cross of MA40/60 is designated by two blue dots. Red dots are denoting the places of positions closing after MA5/20 were crossed downward. One blue dot shows the place where the position in the direction of the current trend was opened again after MA5/20 had crossed upwards.

The next chart is the same as above, but with the aim of comparison it has another combination of four Simple Moving Averages - MA8/13/34/55.

I understand perfectly that all stated above is not something new. But looking at beginners I noted that disregarding the current trend is one of the most often met mistake, which lead to losses. Therefore, the aim of the above material is to remind once again about the necessity for checking the trend direction before entering the market.

Good luck !

© Nikolajs Serikovs, April 30, 2003

PRACTICAL COURSE FOR BEGINNERS (2)

THE FRACTALS AND ONE SIMPLE MOVING AVERAGE

THE FRACTAL

Fractal…  what is it? For our trading purposes and in accordance with Bill Williams, we’ll remember that the  fractal on the chart is a structure  built of bars or candles. Fractal’s structure consists of 5(five) bars, where there must be a central bar and two bars on his left and two bars on his right side.

if we place here candles instead of the bars, nothing would be changed, in the sence of fractal’s structure.

The fractal directed upside must have a central bar and two bars on his left and on his right with their highs lower than the high of the central bar. Those bars minimums are not important. Relations betweem highs of the 2 bars placed on the left and 2 bars on the right from the central bar are not important. It is important that highs of all  left and right bars be lower at least for one pip(point) than the high of the central bar.

The fractal directed downside must have a central bar and two bars on his left and on his right with their lows higher than the low of the central bar. Those bars highs are not important. Relations betweem lows of the 2 bars placed on the left and 2 bars on the right from the central bar are not important.
It is important that lows of all left and right bars be higher at least for one pip(point) than the low of the central bar.
The price level of the fractal’s central bar is always an important level of support or resistance for the price movements.

FRACTAL'S FORMS (central bars are in red)

Two or three central bars and sometimes more (here marked in red) always must have the same price  level and they are playing the role of ONE central bar.
If we have between 2, 3 or more central bars with one price level, another bars not penetrating the price level of the central bars, then we simply don’t count them at all(as in the fractal on the right in the second row).
The main thing is that we must have in any fractal structure 2 bars on the left and 2 bars on the right from the central bar, and their lows must be higher than the central one or their highs be lower than the central high.

The fractals are present at any time scale (5 min, ... 2 hours,.... day, etc.,).

Fractals are like flags installed at places were all the market participants decided not to move further. But when the fractal is broken, it is a signal that the market participants decided to move beyond the “border” created by fractal.

IMPORTANT NOTICE !!! The fractal is considered born or formed(and therefore the price level of the fractal becomes ‘legal’ for any calculations), only when the second bar on the right from the central had been closed and the next bar was opened.

This is a very important rule, because in this manner the market itself shows important levels inside it.

One should study the types of fractals’ structures very goood so as to determine them on the charts automatically himself. Today there are programs where the fractals are shown on the charts, but it is always better to know for yourself.

Here is an example of MetaTrader 4 chart with fractals marked by red ticks(grey by default):

MOVING AVERAGES(MA)

There exist several types of this indicator, namely : simple, exponential, weighted and shifted Moving Averages.
In the prominent book “Technical Analysis of the Futures Markets”, written by John Murphy there is a story about the Merril Lynch research group, studying the Moving Averages. In the result of their research they came to a conclusion that among all types of Moving Averages – the Simple Moving Average(SMA) is the most effective and in the best way reflects the price dynamics. That is why we shall speak here only about Simple Moving Averages.

We shall use the one hour time scale as a basis and work mostly with hourly charts. In no case should this prevent anybody from using the charts in any other time scale. We shall use the МА16. Of course any trader may expirement with other meanings  for his Mas.

Now let us us see how can we use both, that is the fractals and Simple Moving Average(SMA or MA) to trade the markets. The general principle is very simple. When MA16 moves downward, all the fractals(upside and downside fractals) must be UNDER MA16 and when MA16 moves upward all the fractals(upside and downside fractals) must be ABOVE MA16. Of course, some bars or even fractals would penetrate MA 16 in both directions, but the above stated is the main idea, and about penetrations we shall speak in the section concerning stoplosses and methods of closing the previously opened position.

At this chart we may see, that MA16 is directed downward and fractals are UNDER MA16.

At this chart we may see, that MA16 is directed upward and fractals are ABOVE MA16.

We all know that the price goes up and down and therefore we should find the place where the given trend(direction of price movement) will be changed or broken.

How should we do it ?
It is also very simple. In accordance with Bill Williams, we should wait or look for at least one(though two are much better) fractal(s) opposite for the current trend with its(their) central bar(s) protruding beyound MA16.
That means that if MA16 is directed downward the highs of the central bars of these fractals should be ABOVE MA16 and if MA16 is directed upward the lows of the central bars of these fractals should be UNDER MA16.
When such bar(or two bars) is(are) broken it is a signal for us to enter the market.

When we have 2(two) fractals opposite for the current trend with their central bars protruding beyound MA16, then we enter the market only after break of the second fractal.
What is the “second fractal”?
Both fractals in the pair may be of the same level(level is the price level of the fractal’s central bar) and then we enter the market after break of this level. But more often two fractals in the pair have different levels. One of them would be higher than another when we are awaiting the upward break of the current trend and this will be the “second fractal”. One of them would be lower than another when we are awaiting the downward break of the current trend and this will be also the “second fractal”. We receive the best signal for a trend break when the second fractal is on the left in the pair and it is broken by the price. The break of the combination where the second fractal is on the right in the pair quite rare gives a good move and more often signals that the reverse may soon happen.

Now about stops. Where should we place them ?

Placing of a stop-loss order. We place a stop-loss order 2 – 4 pips beyond the peak of the nearest maximum opposite to open position fractal.
Still the common practice demands to place a stoploss beyond the second to the left opposite fractal. Only when the second to the left fractal is absent, we simply choose the nearest maximum opposite to our opened position fractal or simply any bar.

Signals to leave the market or to close previously opened position.

1/ The close of a countertrend bar appears at least for 1 point beyond simple MA16.
2/ Break of the countertrend fractal  happens beyound simple MA16.
3/ Drawing a trendline using the fractals(if the fractals are absent, one must use the most prominent bars) and leaving the market on the first break of the drawn trendline by the price.

Meanings of digits on this chart:

1 – sell on downward fractal break
2 – close of sell on break of trendline
3 – close of sell when opposite to trend  bar ‘close’ appears beyond simple MA16.
4 – buy on upward fractal break
5 – stop-loss placing 2-4 pips under the fractal.
6 – close of buy when opposite to trend  bar ‘close’ appears beyond simple MA16.
7 – buy on upward fractal break
8 - stop-loss placing 2-4 pips under the fractal
9 – buy on upward fractal break with stop-loss at 8.

It is well-known that the market sometimes happens to be in the range, when it seems nothing is clear, but such cases are very important, as the longer is the time period for the range, the bigger will be the movement after the break of the range. First, what the trader must remember, is that only break of  range extreme bars/fractals becomes a signal for sell or buy. Breaks of fractals inside the range are not signals.

On the next chart we see the range marked by two slate blue lines. Red dots denote the up and down extreme fractals. The range itself was formed during 17-Jan-08 and was broken(green dot) only on 21-Jan-08 and gave a nice move for approximately 150 – 160 pips. The most difficult here was the process of waiting. Not every trader can withstand this  ‘waiting’. It is one more example of needed strict discipline for the trader.
In addition to that, we may add, that during the range MA16 was almost horizontal and when the break of the range happened, MA16 was  already clearly directed downward.

Attention and discipline – two factors which would bring you a success.
Hey, isn’t it the same in any business ? Looks like it.

Good luck friends !

© Nikolajs Serikovs, February 01, 2008

PRACTICAL COURSE FOR BEGINNERS (3)

DEFINITION OF TARGETS AND ARITHMETICAL PROGRESSION

In the world of forex and other financial markets the technical analysis(TA) nowdays stands at the main position among others. A great number of research in the field of TA have had been already done, but the persistent investigators still continue their researches all over the world.
It is well known that there exists a hidden hope to find the method, which would provide simple and easy process for determination of price resistance, supports and points of trend breaking or reversal. The hope is always the last to die, though understanding of the fact, that if the market is functioning there are winners, would not give the chance for the hope to die ever.

My personal research of the price charts had led to creation of the whole row of rather interesting methods in the field of calculation of price targets which would be mostly reached by the price itself. Here I wouild like to speak about one of them. The method is exclusively simple and reliable. Let us remember a well-known saying, that the simpler the system, the less is the possibility of its failure.

The following procedure is the essence of the method.
In compliance with the previous article we find the signal fractal, note the price of its central bar and from the right to the left separate two digits from all digits in the price. For example, on August 13, 2004 in the 15 min chart of AUD/USD there is a fractal directed downward with the price of the central bar as 0.7057(in compliance with SAXOBANK charts; all charts data in this article are taken from Saxobank charts). So, from the price 0.7057 we separate two digits and receive a number 57. This number we consider as the “a” number in the future(while developing of the trend or price movement) arithmetical progression.

Reference. ARITHMETICAL PROGRESSION is a sequence of numbers, where each next number is created by addition of a constant number “a”, which is called a difference of arithmetic progression; e.d. 2, 5, 8, 11… ; a=3.

As the price started rising, we define next price targets by simple adding of number ‘a’ to the number 0.7057. For the sake of simplicity we operate with number 7057.
7057 +57 = 7114, 7114 + 57 = 7171 etc.

Let us see what had happened in reality.
On the August 13, 2004 16:00 GMT the maximum price level starting from 0.7057 was level of 0.7176 with the close of 0.7173.
It is interesting to note that on the hourly chart the maximum price on that day was 1.7178 and maximum close – 1.7176. That is all.

Another example.

USD/JPY, 13.08.2004, 06:30 GMT, the highest price 112.08; then the lowest price – 110.45 and the lowest close – 110.54.
From number 11208 we separate from right to left two figures and receive number ‘a’ = 08 or simply 8. For the trader who has ehough patience to constantly calculate arithmetical progression due to a small size of a number ‘a’, this number is also good and reliable. During relatively long calculations we get 110.48, the level which was 3 pips penetrated with the lowest close 110.54.

For those traders who are irritated by small numbers and prefer operaions with bigger numbers, the same method may be used with slight changes. As number “a”= 8 does not satisfy us with its size, we would separate from the number 11208 one more digit and get “a” = 208. This number may be considered relatively big and we divide it in two, receiving 208 : 2 = 104.

11208 – 104 = 11104, 11104 – 104 = 11000... here we see on the chart that the price had slowed its movement and started consolidation but being still far from the calculated level 11000. To calculate the price level for the  given price consolidation region or zone, we divide 104 again in two and get “a” = 52. Then we add 52 to 11000 or deduct it from 11104 and receive 11052 or 110.52, which is quite satisfactorily whith real minimum price level being at 110.45 and close at 110.54. Taking into account, that all this was on Friday 13 of August, 2004, it could have been only logical to close opened position in the given zone of the slowed market.
And one more example at the same chart.

Let us take low 110.74, cause left from it upward fractal was broken beyound MA16. We separate two digits from 11074 and get “a” = 74. To have a possibility to define price targets of a smaller size in case the market would start consolidating(as in the above example), let us divide 74 in four and receive ‘a’ = 18.5. This number we shall use(adding here because of price growth) when the market behaviour becomes unclear. Now we start adding :
11074 + 74 = 11148... after this level we note that the tempo of price growth has been slowed significantly and, therefore, we start using ‘a’ = 18.5 : 11148 + 18.5 = 11166.5, 11166.5 + 18.5 = 11185, 11185 + 18.5 = 11203.5 или 112.03 with the real maximum 112.08.

How does the method works when we have such prise level as, for example, 1.2300. The procedure is the same. We do not pay attention to zeroes and separate first two digits from the right to the left. Here number ‘a’ =23. Then we caculate the arithmetic progression by adding or deducting depending on the prise growth or fall.
Here is an example.

Fractal 1.2254 is broken beyound MA16. From peak 1.2300 ‘a’ = 23. 23 : 2 = 11.5. Now we calculate arithmetical progression down from 1.2300.
12300 – 23 = 12277, 12277 – 23 = 12254 (level of the broken fractal), 12254 – 23 = 12231,
12231 – 23 = 12208... the price did not reach this last level and starts correction. We quickly change the number ‘a’=23 for ‘a’=11.5 and start calculate from the last reached by price level, which is 12231. 12231 – 11.5 = 12219. In reality – low equals to 1.2218. We close our position at the first chance for it or wait for appearance of close above MA16 or breaking of the opposite fractal above MA16.
But let us be realists and examine not so good situation on the same chart. Such situations are quite rare.

Fractal 1.2259(blue square) was broken beyound MA16. It was an entry signal. Right stop-loss order should have been placed at 1.2279, that is 1.2271(red square) +3 and +5(spread) = 1.2279. Entry was approximately at 1.2257-6. The stop-loss order was filled and the loss was of 23 pips(1.2279 – 1.2256 = 23). But looking at this chart, it becomes clear, that if the trader entered after 1.2254, he would had all the chances to return lost pips back. But one must have strong nerves and believe into the method(any, of course) which one make use of.

Everything looks fine and not only ‘looks’, but it is real. But there are very important questions, without answering to which, this method would not be so effective. The first and main of them is the definition of the place where one may enter the market, the second( but for some traders it is the first and the main) is definition of place where one must leave the market

Entrance signal and placing of stop-loss.

Entrance signals, placement of stop-losses and signals to leave the market are borrowed from Bill Williams with insignificant changes.

Break of the fractal whose central bar is beyound simple MA16 in the direction of this fractal is a signal for us to enter the market in the direction of the fractal break and for the start of arithmetical progression calculation. The latter should be calculated from the price number of the nearest maximum opposite fractal. On the chart above, red dots show the broken fractals, where one should have entered the market. We place the stop-loss at the level which is 2-6 pips beyound the nearest maximum opposite fractal.
For the first from the left fractal defined by the red dot the right stop-loss should be placed 2-3 pips under fractal 110.44.
For the fractal with the second red dot right stop-loss sholud be 2-3 pips under fractal 110.74.
For the fractal with the third red dot right stop-loss sholud be 2-3 pips above fractal 112.08.   

Signals to leave the market.

There could be a lot of signals for leaving the market, but I shall speak here only about four of them.
1/ Countertrend bar close beyound simple MA16 at least for 1 point( shown by a small blue square).
2/ Countertrend fractal break beyound simple MA16( all red dots – levels for leaving the market after their breaking).
3/ Drawing a trendline using the fractals(if the fractals are absent, one must use the most prominent bars) and leaving the market on the first break of the drawn trendline by the price(blue trendline on chart above).
4/ The price had reached one of the calculated targets.

It is absolutely clear that from time to time closing of position in compliance with the above stated methods may be a bit beforetime, so to say, but we must pursue an idea of positive balance(!) and not trying to shine with effective position closing at the peaks.
There exists one more very important moment. What should one do when the market stalls in the range or consolidation? The answer is not simple, it is very simple…. On the hourly chart the market is in a mess. 0ne should enlarge in succession the time scale of the chart in question, till the clear , understandable stiuation with the fractal beyound simple MA16 is found. Let us imagine that we had discovered such situation on the 8 hour charts after unclear situation of the consolidating market on the hourly chart.

On the above hourly chart we have an example of long and tedious consolidation of EUR/USD. From July 28 till August 06, 2004 the market was in a severe consolidation and it was extremely difficult to understand which side it would move. We started enlarging time scale in succession and on 8 hour chart discovered quite clear sutuation. The fractal 1.2072, being the first fractal beyound MA16 broken on the 8 hour chart is shown here only for sake of comparison.

Fractal 1.2072 was broken and after this we should have only wait for the rise to come or, if fractal 1.1968 be pierced – the fall of the market. By the way, here for the price growth the number ‘a’ = 68 and the calculated arithmetical progression would become as follows :

11968 + 68 = 12036
12036 + 68 = 12104
12172 + 68 = 12240
12340 + 68 = 12308
12308 + 68 = 12376 ... , it is interesting to note, that on 13.08.2004 the maximum price was 1.2373.

In the last described case of consolidation market situation becomes clear and the rule of right stop-loss permits one to calculate the size of stop before one enters the market. In this case the stop equals to 114 points.
(1.2079(buy) – 1.1965(1.1968 – 3 spread = 1.1965) = 114 pips). The trader may accept such stop-loss size or may not, and, therefore, not enter the market. The latter is sheer individual decision and no advice may help here.

It is only obvious, that there are a lot of cases when to understand the situation, we must reduce the time scale in succession. Here is an example. EUR/USD, hourly, 16.08.04. The price started moving without fractal broken beyound MA16.

We reduce the time scale to 30 minutes. And momentarily see the fractal 1.2362 beyound MA16.

The stuation is rather fine, escpecially due to small stop-loss. Peak 1.2382 + 3 and +5(spread) = 1.2390.
1.2390 – 1.2360/58(apprx. entry price) = 30/32 points for the stop loss order.

When we enlarge or diminish the time scale to find the entry place, we must remember well known rule to monitor and close the opened position in the same time scale in which position was opened.

And now the last variant when trader does not see clear situation at some currency pair(which is rare if we check all time scales). Then one must step aside from this pair and continue checking any other currency pair for the clear, understandable market situation. It is quite possible that such would be found.

Good luck friends !

© Nikolajs Serikovs, October, 2004

NOTE. All charts are courtesy of Saxobank.