BASIC FOREX TRADING COURSE --- Lesson 5

INDICATORS

There are many indicators traders use but I intend to make your life much easier and want to keep it as simple as I can. If you go deep into each and every indicator, you will get confused and could make wrong decisions.

I am going to give you a Strategy based on only 3 indicators. You must first try to understand how these indicators work so that you know what you are doing when you apply the Strategy based on these indicators.

No Rocket Science, just simple enough for anyone to understand. I am going to teach you how to use (1)MOVING AVERAGES (2)MACD and (3)RSI

MOVING AVERAGES

No one can trade without the use of Moving Average indicator. It tells us a great deal about how the Market is turning. This is a MUST indicator.

Moving average is calculated by adding the X number of closing prices and then dividing by X. For example you take 5 candles closing prices, add them together and then divide them by 5. This will give you an average of 5 candles closing prices. On a chart there are many many candles and the calculation goes on and on and we see a smooth line running across the candles up or down. Now the good news is that you do not need to do any calculation. The charting package you will use will do the calculation for you.

You can adjust the candles to whatever time period you like. For example 1 day, 4 hours, 30 minutes, 1 minute, etc. A 30 minute candle will show you that during the 30 minutes period where the price opened, how much did it go up and down and where did it close.

By visually inspecting the Moving Average you can see where the trend is. Is the Market going up or is the Market going down.

Here is a Moving Average which shows a Down Trend.

There are many variation of the Moving Average indicator such as the Time Period, Simple or Exponential or Weighted, etc. At this stage of your learning you do not need to remember them or use them until you get some more experience and proficiency. All you need to know is that we use 2 Moving Averages, one fast and the other slow.

If you are Day Trading as I do, you would normally use a 5 period Close Simple Moving Average(fast) and an 8 or 10 period High Simple Moving Average (slow). I use the 10 period High Simple Moving Average to indicate to me when to get out of the market with a profit.

If you are Trading Medium or Long Term then you would use other periods of say 33 periods to 100 periods. I am not teaching you the Medium and Long term Trading here. The reason I am teaching you the Day Trading technique is to use my Strategies to MAKE LOTS OF MONEY.

The combination of 2 Moving Averages tells us when a trend is about to change. When the Fast Moving Average crosses the slow Moving Average from below, the trend has changed to an uptrend, the prices are going up (good time to Buy) and when the Fast Moving Average crosses the Slow Moving Average from above, the market has changed to Downtrend (Good time to Sell). An example is given below:

In the above chart you can clearly see that the Red Moving Average (Fast) line has crossed the Blue (Slow) line from above and prices have started falling down. At this point we Sell and then we Exit when we see that the Red line crosses the Blue line from below. We get out of the Market with a Profit.

Then we see that the Red line has crossed the Blue line again from above. This gives a signal to Sell again. But its a False Alarm as you can see for yourself the price just stalled and went up again. Had we entered the Market again we would have made a loss as the Market went up. In order to avoid getting False Signals, we use additional indicators such as MACD and RSI for confirmation.

Next we see that the Fast Red line has crossed the Slow Blue line from below. This is a great point to Buy. And when the Red Line croses the Blue line from above it is a good time to exit the Market with a Fat Profit.

Life is not that easy, as you can see many ups and downs we call whipsaw. But there are trader who sit infront of the computer all day long and keep taking small profits every now and then. This is called Scalping. I intend to develop a Scalping Strategy later on when I get the time to do so.

In order to avoid getting False Signals and sustaining losses we use some additional indicators to confirm with the Moving Average when to enter the Market and when to get out with a Profit. One of them is MACD.

In your next Lesson, you will Learn all about MACD and RSI Indicators and How to use them for confirmation of an Entry Signal.

Keep watching for your Next Lesson...