As many of you have read before, Forex is the most amazing and popular electronic financial market: It moves 1.5 trillion dollars a day, what NY Stocks market moves in a year. A 24 hours a day, 7 days a week market, with high volatility and liquidity, and with a plus advantage: leverage. A market where you can choose, to go bull or bear with no cost: no extra premiums to pay, no additional options. Seems pretty much convenient right?

Well let me tell you the disadvantages before I continue: high volatility, liquidity, leverage. Yes, just the same: Advantages are Disadvantages too. All this things can play against you as well as for you, with an extra: Brokers. Most retail traders must use a broker, who will be the counterparty in all transactions as there is no way to deal directly in the interbank market. And, as brokers are market makers, they can widen spread, or even refuse to trade during particular moments or conditions.

So, why are we here? What makes Forex so attractive, so popular? Where is the DIFFERENCE? A non written rule says only 10 % of Forex traders are successful, against the 90 % that blow accounts.

I remember when I completed my technical course, my Master telling me: now you’re ready, you have all the tools you need, the tools most traders don’t have: you have technical knowledge, psychological training, and effective money management rules you can and know should apply. Took me pretty much a year to understand his words, but there is the difference: believe it or not, the “90 % losers” trade without using technical analysis, without a working plan, without nothing but the ambition to become rich in a pretty short term. Most Forex traders, trade by impulse following a hunch more than a trend. Using guts instead of indicators or oscillators.

Over the years I have been here, I also discover another difference: most traders spend there time looking for The System, the unique, the perfect one, of course one developed by someone else, instead of even trying to study two or three simple indicators; of course as soon as a systems gives a bad entry, they discard it, and jump into another: and there goes their money.

One last word before diving in technical: remember here there is another important difference with other financial markets: time. For Forex traders, short term refers from minutes, to a few hours. Traders can work and profit with 4 hours, 1 hour or even 30 minutes charts.

A simple an effective way to start with technical Forex trading is using Moving Averages: as you now, a Moving Average is a trend direction indicator that calculate a simple arithmetic average of prices for a specified period, showing the average value of the price of a currency over a set of value. There are different types of MA: we use SMA for simple moving averages and EMA for exponential ones. There are others kinds of MA, (smoothed, linear weighted, etc) but we will limit this short study to the firsts ones, as they are the most used.

The SMA: Calculates the average of the price by adding the prices of the specified period together, and then divides it by the number of the prices.

SMA = Sum of “x” periods /X

Where x represent a certain number (could be almost any one from 2 to 500 depending of how many historical information your charts include); besides, many chats allows to select a chosen set to apply the calculation: Open, close, high, low, median or typical price.

The EMA, smoothes the MA by adding to the current closing price, the previous value and giving the last prices more weighted value. This type of MA reacts faster to recent price changes than SMA.

Different ways to trade with MA

There are many different methods and settings of Moving Averages a trader can use; let’s see two basic methods, with some of the common settings, useful for intraday trading, remembering that MA work better in a trend market and they are not reliable in sideways ones.

A basic trading system is to use a MOVING AVERAGE BREAKOUT. In this method, you have to draw a MA in any selected chart. Let’s see an example in a 1 hour chart of EUR/USD. I used a SMA of 20 periods (blue). When the price crosses the Moving Average down-up and there’s a new candle opening above the Moving Average indicator we buy; and when the price crosses the Moving Average up-down and there’s a new candle opening below the Moving Average indicator we sell. Your exit signal will be the price crossing the MA on the other way.


But this is not as simple as it seems, and not reliable as we need: a Moving Average Breakout must be combined with an indicator to act as filter; something that reinforce the signal, and increase the probabilities of a good trade; the best choices in this case, will be Momentum or Stochastic Oscillator. Any of these two arithmetical oscillators will act as a confirmation of the trade.

Another and off course better way to trade MA, is using MOVING AVERAGES CROSSES. Using this system, you can work with at least two MA, although some traders prefer using three. The first one will be set with a small period (Fast Moving Average) the second one will be set with an intermediate number of periods and the third with a bigger number of them (Slow Moving Average). Let’s see an example using SMA of 4, 9 and 18 periods in a 4 hours USD/JPY chart:


The sky blue is a 4 periods MA, the medium blue represents 9 periods, and the dark blue one, is for 18 periods. See how, when 4 MA crosses 9 MA and then, both of them crosses 18 MA, and you have a good trigger. The 4 periods line crossing the 9 one, is the first advice you have; this signal gets its confirmation when both, 4 and 9 cross 18. Your exit will take place when the slow MA turns back crossing 9 into the other way.

This is a quite reliable and simple system when market moves in trend; besides there are lots of combinations that can be used, using MA or EMA: as an example, a good combination with EMA is 5, 13 and 34. And as in the first case, this system would become even better if you combine it with any oscillator to act as filter.

Anyway, the question here is not only the MA or EMA system selected; this will depend also on the time frame you choose to work: a signal in a 30 minutes chart will not be as strong as one in a 4 hours chart. Also, the “life” of a trade, will depend on two main factors: first of all the continuity of the signal: as long as the conditions that gave the into the market signal remains the same, the trade is valid; as soon as any of this conditions gets lost, you are getting advise to close your trade. Second, we consider a fact that any signal is valid for the next four candles; so if you are trading using a 30 minutes chart, your signal will be valid for the next two hours. After that time, we consider the trade should be completed; if not, then again, you must close your position, as soon as any condition even start to turn.

As one of the main characteristics of the Forex market is volatility traders are force to use a tool that many dislike, but that is much more useful than you can imagine: stop losses orders. I understand is really hard to assume a lost; I don’t understand why many people risk all their capital in a single trade, when Forex gives lots of opportunities a day. Sure, you will lose some times. But as long as you trade using the right tools, loses are just another step in the way. Understanding the delicate balance of risk management is the secret of success in here. Get rid of your pride, find a simple system you like and follow these rules; you will probably close more profitable trades than you can imagine.

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