Currency Trading Charts
Indicators I Use: OK, now those of you who have been on the Making Bread
main
site will know
that in all my trading I like to use very simple indicators on
my currency trading charts, for the simple reason that if you
use too many, then this will simply confuse you, as you end up
with a severe case of analysis paralysis. The rule for all
currency trading is to keep it simple and stupid, and this
applies particularly to your currency trading charts. I
have never been a great fan of any of the lagging indictors
discussed on the previous page ( if you hadn't guessed!)
So what currency trading indicators do I use for my online
currency trading ?
Currency Trading Indicators - Indicators I Use
As I explained on the previous page, I trade using two currency trading accounts with completely different strategies, each requiring very different approaches when it comes to indicators and assessing entry and exit points. In many ways, the currency markets are the purest of all markets. There are no profit warnings, no endless earning announcements, no directors dealings and no mergers and acquisitions. Whilst it is true that the markets react to major economic data, for the remainder of the time, they are remarkably consistent. The currency market is one of the most consistent in terms of trends. Once a trend has started, then the chances are that it will continue for some time to come. In short, the currency markets are relatively predictable, and in my view do not require the myriad of technical indicators so beloved by the analysis paralysis traders, with screens cluttered with coloured lines - works of art maybe, but in my view totally unnecessary. So what do I use and why? - as always I like to keep it as simple as possible, but remember I use two different trading strategies which naturally require different approaches for identifying entry and exit points. So here they are !
Currency Trading Indicator : Short Term Trading Indicators
For my short term foreign currency trading I rely almost entirely on my candlestick analysis, and in particular I will be looking for doji candlesticks. Remember I have been using and reading candle charts for the last 10 - 15 years, and as I have said many times before it is practice, practice and more practice. The candles I look for are the long legged doji, the hammer, the hanging man, and the up thrust. All of these suggest turning points and an opportunity to trade. If you would like more information on Japanese candlesticks, then click on either of these links which will take you to the relevant page on Making Bread, or the site on Japanese candlesticks patterns. The only other 'indicator' I use is support and resistance which is a very simple concept to learn and understand. Many traders ignore this concept completely as it has no complicated charting patterns or concepts to grasp ( more fool them!). It is a simple trading tool which works particularly well in the forex market. When prices have been channelling sideways I use it to identify possible breakout opportunities where the resistance becomes support in an up trend, and support becomes resistance in a down trend. Again I cover support and resistance in full on the main site so please have a look - it is a simple technique but it's simplicity belies it's effectiveness. Now, let me mention trends, and this is perhaps the hardest concept to grasp with short term trading, and it is simply this - if you are trading in 5 minute or 10 minute timescales, the direction of the trade may be opposite to the long term trend for the currency. Placing a trade using 5 minute charts may suggest a turning point, which may only last for the next 15 or 20 minutes, but if you were to look at the 1 hour or daily chart it may tell you something different. You must ignore this temptation to constantly look at different timescales for confirmation of the trade - it will not only confuse you, but will probably stop you trading. YOU MUST decide on the chart timescales for your short term trading and stick to them - DO NOT look at any others. I use three timescales, the 5 min, 10 min and 15 min charts - that's it for this trading strategy, that's all I use. Finally, whatever strategy you use, you must have a trading plan written down. Included in the plan are the timescales that you will use - stick to them and do not look at other timescales, no matter how strong the temptation.
Currency Trading Indicator : Long Term Trading Indicators
A
different currency trading strategy requires a different approach and different
indicators. Firstly the timescales for the charts are daily,
weekly and monthly. The approach is based more heavily on
the fundamental economics of the country and the currency, with
technical analysis playing a secondary role. What we are looking
for here are long term trends so we draw trend lines. I draw
mine manually, but most packages will draw them for you
automatically. The graphic alongside shows you how, but remember
a trend is only formed once we have 3 points as a minimum to
join together. This is the classic approach of higher highs
and higher lows for an up trend, and lower highs and lower lows
for a downtrend. Trends in forex will last longer than you
think!
Secondly I use simple moving averages which confirm the trend based on 50 day and 200 day SMA. Again I have covered this indicator in more detail on the Making Bread site - simple moving averages - Finally, I use support and resistance lines to confirm further moves once the trend has been established. I also tend to use support and resistance levels to monitor changes in the trend, so if I feel a trend has finished then I will use the support and resistance analysis to exit the trade ( combined with an analysis of any change in the underlying fundamentals). So in summary, my analysis would follow these steps in the sequence shown, and remember these would be based on the long term charts. A completely different strategy using a separate account!
- Analysis of the fundamental data for country and currency
- Review the charts for possible long term trends
- Review SMA's for confirmation of any trend
- Look at support and resistance for entry and exit points.
OK - I hope that gives you an idea of how simply I trade - over the years I have often looked at all these so called 'black box' systems and indicators - in my humble view I wouldn't bother. I'm sure there are many traders who swear by this indicator or that particular set up - you have to try these all for yourself - if it works for you, great - each of us is different and what works for me may not work for you.
Now let's look at one of the currency traders favourite currency trade, the carry trade.