Pros and Cons Of Moving Average
Moving averages are the essence of the forex market traders. These “trade foreign currency” tools help traders examine different currencies based on past performances.
There are two types of tools – Technical and fundamental tools. You can read about them here.
It is a reliable technical tool which generates trader signal for market users. These two types of MAs, i.e. simple average and exponential average.
Here, we are discussing the advantages and disadvantages of using this tool. The pros and cons are categorized as per moving average types. However, before moving to the benefits, let’s get through a little bit of understanding moving average.
Moving Average: Overview
A moving average is taking an average of past price records of any online forex trading financial instruments. It works in time frames.
For instance, if you will calculate a 20-day moving average, then it is doing nothing but taking a proportion of the past 20 days.
The most usually available time frames are 10, 20, 50, 100, and 200. Moreover, there are different forex trading period too, i.e. whether you want to take prices of every hour, minute, day, week, or month.
The period, which a trader chooses, plays a significant role in calculating the moving average and the desired result. In the trader’s language, it is known as a “lookback period.”
Now, let us move to the advantages of using a moving average or MA.
Simple Moving Average:
- 1. It is not a sophisticated technical analysis tool, i.e. pretty easy.
- 2. Not affected by ups and downs of an asset’s price, i.e. prone to fluctuations.
- 3. A brilliant tool for identifying the support and resistance points, i.e. a reliable tool.
- 4. Beginner traders can start base trade upon it too.
- 5. Aids and removed short term noises from the chart.
Exponential Moving Average
- 1. It provides a more unobstructed view of the trends than SMAs.
- 2. Acknowledges recent price changes and thus, is more effective.
- 3. Very helpful for short-term and day traders, as the recent highs and lows play a role in it.
- 4. The exponential moving average will analyze the price movements thoroughly. Whether the trend is reversing, losing its track, or is still in motion.
- 5. Much easier than other technical tools.
Simple Moving Average:
- 1. It doesn’t acknowledge recent price changes. It gives equal emphasis to each price taken.
- 2. Not practical for users, trading for short term or intraday traders.
- 3. Allots equal weightage to every price point.
Exponential Moving Average:
- 1. More affected by recently created “false” price fluctuation, and thus, gives wrong signals to traders.
- 2. It requires observing a lot of previous price points.
Moving average makes observing trends easier for a trader, especially for newbies. It made this tool quite famous. But, it would not be a good idea to use this tool on every asset. Every asset requires a different kind of analyzer. What works for a commodity product might not work for another.
Moreover, the time frame should be chosen with care. A little change in time frame can change the results thoroughly. Therefore, we always recommend potential and beginner traders to first do their homework and then start investing or analyzing.
Everyone comes to the forex world knowing that the forex market is risky. Most of the newcomers come and join different Facebook groups after seeing screenshots of people's profits. The more screenshots he shows in our country, the more knowledgeable he is. Hey brother, you can do a myfxbook of your trading account without screenshots or you can add a beautiful account in Forex Factory. If you do not do that, then everyone will know about Hari. There are various traps sitting around. That's why newcomers are more confused. Maybe he wants to move forward with a goal, but in the midst of so many things, he admits all kinds of mental and financial deception and in the end he can't find the right path.Which is the right way?I think if someone reads babypips with their mind and searches on YouTube for things they don't understand, then they need to know a lot. No need to turn around for this. The trading psychology of the person you are following will never match yours. Even if he loses ড 100 a day, Divya thinks about the plan for the next day and maybe you have a ড 100 deposit. The system of a successful trader will give you profit but not. Then you will lose for your own psychological problems.Lack of knowledge of English:This is a big problem for newcomers. Most traders who come to learn English are weak. These traders are in greater danger. He became confused while walking around Nana Ghat.
Have you ever had a feeling that some greater power in the market has singled you out and is doing everything in their power to make your trading life a misery. Because it seems every time you enter a Forex trade, almost immediately you find the market reversing on you? The market is probably just ‘rigged’, or it must be your broker stop hunting you right? Did you ever consider you might be chasing price around the chart, consistently entering the market at bad prices. In this article we are going to take a look at why ‘chasing’ price around the charts is impractical, ineffective and why it will unravel you mentally. The feeling that you might ‘miss the train’ Have you ever been sitting in front of your trading desk, watching the candlesticks tick higher and lower and then noticed a significant price event unfolding in front of your eyes? This event could be price breaking through an important support or resistance level, or maybe a trend line. Whatever the situation, the price action makes your eyes light up like a Christmas tree. You whip out the trade order window as fast as you can. You proceed to enter a Forex trade at the ‘market price’ with a high level of urgency. You’re in the trade, fuelled up on adrenaline, and on the edge of your seat watching the market go crazy as price breaks through the key point on the chart. You’re thinking to yourself, ‘oh this is going to be a massive breakout and land me the big trade I’ve been waiting for’. Then all of a sudden the movement reverses and now you’re on the wrong side of the market. Stop chasing your own tail An event like this could leave the un-educated trader banging their head on the keyboard, repeating ‘what went wrong?’ I know the feeling, but the market doesn’t work the way as everything else does in your everyday life. It operates in a more counterintuitive way, what you think might be the right way to do something is often the wrong way. You believe you enter a forex trade with military precision when really you’re as sloppy as a 2 year old with a crayon. The markets are full of deception, emotions, traps and psychological torture that will absolutely rip you apart mentally if you’re mind isn’t ready for trading. Trying to trade the market uneducated, or unconditioned is like trying to navigate your way through a land mine field, blindfolded. If a commercial airliner crashed without warning, investigators would act quickly taping off this accident scene to do some crime scene investigation. So let’s quarantine this type of aggressive trading and get a bit more of an understanding of why so many people churn and burn. When you enter a Forex trade by chasing price, there is an obvious lack of planning in the trade execution. Throwing orders at the market on the back of impulsive price movements might seem like the right thing to do in the heat of the moment. A decision making process like this is generally derived from ‘emotionally fuelled distorted logic’. Secondly, the trader has allowed the market create a high level urgency within themselves. Inducing that feeling of ‘if you don’t jump in RIGHT NOW, you’re going to miss this move and never get another chance’. The high sense of urgency throws trader’s into ‘panic mode’ and the need to take action, superseding any rational thinking. We’ve all been guilty of ‘chasing price’ at one stage. The market slapped us back in the face for it too. If you impulsively enter a Forex trade like this and it actually works out, you are at a high risk level of being a victim of the random reinforcement principle. You’re rewarded for the bad behaviour, which encourages you to do it more often. You won’t get the same result each time. It will be like a drug user ‘chasing that first high’. It eventually unravels you completely as a trader. If you really are passionate about trading and want to become a good trader, focus train of thought away from brute force attacks on the market. Projected your time toward proper risk management and logical trade execution. Trade the right timeframe Timeframes are going to play a huge part in how successful you are as a trader. Generally when we first embrace Forex trading, we are easily lured into the lower timeframes. Other trades make promises that the lower timeframes offer ‘more trading opportunities’ and the ability to ‘make more money’. What they don’t tell you are the signals have much less value on the lower time frames as they do the with the higher timeframes. Low timeframes – Lots of signals, but low quality. Plenty of breakout traps to be caught up in, and lots of market noise. High timeframes – Less signals, but with low risk high reward profiles. Less breakout traps and more market stability and clarity. Don’t fall into the idea of trading on the lower timeframes will make you more money or enter a Forex trade via lower quality signals. You’re taking trades that contain no real substance or value. They don’t contain enough price action data, and expose you to a high level of risk. Intraday noise on the low timeframes can be so intense, trying to trade it is really just ‘chasing ghosts’. On the 15 min chart below, we observed an aggressive 15 candle that closed below a support level. Something a lot of traders would have shorted into. It looks like a really large move and some uneducated traders would call this a ‘market crash’. Because we are on the 15 min chart the move looks bigger than it is. The total move is only about 30 pips… Then this happens… Just another typical breakout trap that occurs very often on these lower timeframes, like the 15 min chart. It’s hard to make sense of what’s going on here using these charts. Even with the best Forex trading strategy, you will still have to deal with the high level of noise and ‘false signals’ that plague these intraday charts. Now let’s have a look at a typical scenario on the daily timeframe… Market closes below support level and produced clear bearish breakout follow through. See how the daily chart just paints a much better picture of what’s going on in the markets. At first glance it’s easy to see this market has a dominant bearish trend momentum with very little noise. That’s why we recommend to make the switch to the higher timeframes. The signals are lower risk, the market has more stability and clarity, and you have less chance of being caught up in any whipsaw type movements. Create your own traps, Enter a Forex Trade Using limit and stop orders There are generally two ways you can approach your trading. You can be like most traders and sit there in front of the computer screen, watching the market tick around all day patiently wait for a signal to develop. Or, you can identify signals by checking in on the markets from time to time, using pending orders to enter a Forex trade. Pending orders are great for setting up your own ‘price trap’ to catch price exactly where you want and automatically enter the market for you. This saves you the mental punishment of staring at the charts, waiting for price to reach your desired entry point to pulling the trigger manually. There are two types of pending order options, Limit and stop orders. Stop orders are used to buy the market above current price, or sell below current price. Stop orders are used to catch breakout trades and we would typically use stop orders when setting up Inside Day and Indecision Candle breakout trades. Limit orders are used to buy the market below current price, or sell above the current price. These are great for when you want to catch market retracements. We use limits orders all the time with our retracement entry method… Here is a rejection trade I recently entered on the USDJPY daily chart. I wanted to take advantage of market retracements, so I used a ‘buy limit’ order to set up my price trap… As anticipated a retracement did occur and my limit order was hit and automatically converted into a market order. Once you’re order is set, its hands free from there. This type of ‘fire and forget’ trading is something we practice a lot. The price trap played out as anticipated and caught the retracement. This automatically converted my limit order into a market order. We use these type of entry / stop combo with our end of day trading strategies. It’s less work for us, and yields more results from the market. Think of it this way, you’ve got a problem with a rat that you need to get removed from your house. You’re not going to run around shooting off a rifle at anything that moves hoping to randomly hit it. Instead you set up a trap, bait it and let the rat get caught. The ‘set and forget’ approach here can be applied to the markets just as easily. Set up your price traps, let price come to you. Don’t chase the market around and enter a Forex trade at random price movements. Avoid being caught in a trap yourself There are certain spots/conditions on the charts that are considered to be high risk zones to trade into, and should be avoided. One of these areas are weekly support and resistance levels, which are one of the major turning points in the market. If you’re fixated on the 15 min chart, you may not even be aware of these levels. Open up your weekly chart and map out these major termination points. You will be amazed at the price action you can take advantage of here. Sometimes the market will create the illusion that a ‘breakout’ is occurring through these levels, drawing in unsuspecting traders into very bad positions. Weak traders enter a Forex trade from impulsive reactions triggered by events like this. Once all the suckers are positioned in on the bad move, the market will pull back the curtain and reveal its true intentions… The break through the weekly level was a classic bull trap and absolutely destroyed everyone who ‘jumped in’ with the buying frenzy. Avoid trading into these major turning points on the chart unless you have a damn good reason. The market lays down these traps to wash out weak traders. Focus on trading away from these major turning points. Use strong reversal signals, or by waiting for a breakout then a retest from the other end. Stop swinging your sword around like a mad man, set your trades up then walk away Are you guilty of using a ‘machine gun’ mentality, and offloading a bunch of orders into the market hoping one of them hit a target. If you really want to become a good, consistent trader, it’s time to move away from this savage mentality. Start trading with a cool, calm and collected approach. Plan out your trades more carefully, only load your weapon with one bullet. Pull the trigger and enter a Forex trade when the probabilities are in your favour. Make every shot count. After you’ve entered a position, try to be at least involved with it as possible. How many times have you missed out on potential profits from a trade because you’ve emotionally intervened? Don’t stare at the charts, don’t stare at your trades. Fire off your order, walk away and go live your life. If you think you you’ve been smothering the market too much and need to put some distance between you and the charts. But you still want to be an active trader at the same time. You may be interested in becoming a war room member where we do exactly that every day. We teach price action trading techniques that allow to you to have a minimalistic approach to trading. You can achieve good returns on investment, with plenty of time during the day to do things you like to do. Stop by the war room info page, if you’re interested in more information on our War Room membership package. Cheers to your trading success.
Learn the classic market cycles of accumulation, mark up, distribution and mark down so that you can time the market -consistently – and make steady profits any time. When you hear someone on TV say that “market timing” is impossible, they are wrong. Let me be the first to say that market timing is not only possible, but also profitable on a consistent basis. As a technical trader, your purpose is to find the best trades and to time your entry and exit points. After all, you can find the best trade in the world, but if it is not timed well, it may turn into a loss. Every stock or asset class goes through a classic market cycle. When you look at the chart of any stock or index, it moves in cycles. We are all going through a life cycle, and we are also in the autumn stage of the seasonal cycle. By observing cycles, we know what to expect next. This is true for stocks. If you noticed, all three were homebuilders and they have completed their market cycles which has ranged from 5 to 10 years. If you are a long-term investor or trader, your understanding of market cycles will greatly benefit you. Let’s talk about each stage and what is going on during each stage of the cycle:Stages of a Market Cycle* Accumulation Phase – This is the bottom (or near the bottom) of the market for a particular stock, sector, or general market. At this stage, prices do not move upward but rather stay within a neutral range. At this level, the smart money begins to buy up large blocks of shares to accumulate a large position for their portfolio. They are patient enough to be able to wait years, if needed, because it is difficult to determine how long a stock or sector will be in this stage. Regular individual retail investors do not even consider buying at this level because, in most cases, they have recently sold close to the lows. It is at this stage where you pick up the biggest discounted stocks. This is where long-term investors should be buying to realize the greatest long-term gains.* Mark Up Phase – This phase follows the Accumulation phase and the way to know if this phase is occurring is to see a stock or sector that has “broken out” of its neutral range. This means that it must break above the upper trend line of the neutral range. From this point on, you should see an obvious increase in volume. Most of the institutions and individuals who are aware of this early trend will jump on board and bring along significant buying power with them. Another way to tell if you’re in this stage is to see if we are forming higher lows and higher highs, confirming the start of a new uptrend. Toward the end of the mark up phase, you will see full market participation, meaning everyone from the shoe shiner to the cab driver will most likely have made an investment. This sets us up for the next phase:* Distribution Phase – This is the top of the market for a particular stock, sector, or general market. Supply overwhelms demand after the smart money sells their shares to the “greater fools” who buy at the top. Because there are no other buyers left to raise the price, a stock or sector cannot advance higher, and thus, will collapse under its own weight. The sentiment is extremely bullish. This phase is marked with extreme greed and fear. The best way to identify a top is through chart patterns, most notably, the head-and-shoulder and double top formations combined with breakdowns at the 200-day MA. This phase is usually marked by the greatest volume levels for a stock until we reach the Accumulation phase once again.* Mark Down Phase – Prices are in free fall and stocks are in full liquidation mode. This group is made up of people who held beyond the Distribution phase and did not sell, or those who bought at or near the top and refuse to sell at a loss. Either way, a loss will be incurred, and the size of it will be determined when an investor wishes to cut it. You should not be buying at this stage and those that try to find a bottom will be disappointed.Return to Accumulation PhasePhase StrategiesAccumulation PhaseInvestors: Cash » BuyTraders: Cover/ BuyMark Up PhaseInvestors: BuyTraders: BuyDistribution PhaseInvestors: Sell » CashTraders: Sell/ ShortMark Down PhaseInvestors: CashTraders: ShortSentiment CycleIn addition to the actual price cycle, there is also a sentiment cycle which accompanies each stock, sector, or overall market. Here is the general range of emotions that follow (each chart is different, so this model is not exact for every situation): You may have found yourself within each of these emotional phases. Now that you know what to expect for each cycle, you’ll have to harness your emotional involvement and separate it from your trading activities. You are your own worst enemy because emotions give room for destructive impulse trading. By understanding each cycle and what emotions follow, you’ll be better prepared. By now, you understand why high flying stocks crash to their lowest levels. Market cycles are a normal and necessary function in balancing the financial markets and restoring equilibrium to the forces of supply and demand. You are now positioned to take advantage of every market cycle for every stock and every sector in the future. Take a look at 3-year charts for TRA, CROX, and MON for additional examples of full-length charts.