Have you ever found yourself on the “wrong side of the trade”? Many traders experience this quite a bit. One problem that they have is in determining the trend’s direction properly.
As a Forex Course Instructor, I’ve found that people have a hard time being confident that they’ve drawn trend lines properly when they are newer to this market.
Therefore, I’ve put together a simple, easy to follow strategy to help get you “out of the gate” and running.
It does two things well. FIRST, it determines the trend direction on the time frame that you’re on and then SECONDLY it tells you when to enter that trend direction on the time frame you’re watching.
The indicator that tells you the trend direction is automated on the chart. You don’t have to draw on the chart. What is the trend indictor? It’s called the 50 period Simple Moving Average (SMA). Any charting package will have a simple moving average in its package. Therefore all you have to do is fill in the number of periods that you want (which is 50).
The “entry indicator” is the Slow Stochastics with the settings of 14,3,3. These might not be the default settings but once again, you can put in the parameters when you load up this indicator. Again, this indicator is on just about any charting package out there.
The trend indicator (50 SMA) will point out the “medium term” trend direction on the time frame of your choice. I’d suggest using at least 1 hour or 4 hour charts with this indicator. You can even use a daily chart if you’re a longer term trader. However, where the odds start to go against you more is when you use time frames below the 1 hour (60 minute) time frame.
Make sure to use the High Probability Time Frames!
Focus on the 1 hour or 4 hour charts. Scan through all of your pairs on your charts to find the clearest trend direction.
When the trend is not clear (like when its trading sideways, crossing above and below the SMA often) we’d skip that pair and go on to a chart that is more clear.
Here’s how to use the strategy!
Once we have the clearest up or downtrend, then we wait for entry signals in the direction of that trend.
When do you get a Stochastic buy or sell signal?
Buy signals come when the 50 SMA is pointing upward AND the two Stochastic lines go to (or under) the 20 level (lower horizontal line on the chart) and then cross over each other and turn upward.
Sell signals occur when the 50 SMA is pointing clearly downward AND the Stochastic lines go to or above the 80 level (upper horizontal line) and then cross over each other and head downward.
The key is to ONLY enter upon the signal that is in the direction that the 50 SMA is pointing and not counter to it. So let’s put it all together.
Putting it all together!
If, for example, on the left side of a chart we’d have a clear trend pointing upward, it would be pointed out by a distinctive upward slope of a 50 SMA. Therefore, we would only take Stochastic buy signals.
Then imagine the pair goes into a sideways range (no definable trend) in which case we wouldn’t take any trades. We could either wait for another trend to emerge or we could simply go onto another chart with a distinct trend direction. But let’s say we’d just wait for another trend to emerge.
Say we notice that on the right side of this chart the trend direction turns clearly downward. Therefore, we should only look to enter upon Stochastic sell signals.
Using this simple strategy, you will have no problem defining the proper trend direction (which is where many newer traders mess up) and you will have no problem knowing when the strategy tells you to take a buy or sell signal and you’ll know which one is the higher probability signal by filtering the signals in light of the trend’s direction (as defined by the 50 SMA).
Here’s how to Manage your Risk in the Trade!
So that’s the strategy. However, I want to note one last important, vital ingredient: Your STOPS!
Be sure to place a stop (or an opposing entry order) on the opposite side of the moving average. In other words, if the moving average is pointing upward and you buy, then your stop needs to be well below the upward sloping moving average. If the moving average is pointing downward and you enter a sell trade, then you want your stop (or opposing entry order) to be above the moving average.
Start off trading small. Use so few of lots to where IF you were stopped out on the trade, you’d only lose 1-5% of your account balance and no more!
You can either take profits when the pair has traded away from your entry point by twice your stop distance OR when the trend distinctly changes into the opposite direction. The former scenario will be best for most beginners using this strategy.