Trading System: Moving Averages

Ok, this system is pretty basic, and I haven't tested it yet. I've been going over it and saving charts and it's looking real good so far, but I haven't actually been running it. I haven't been trading it using my demo account. But I'll give an overview of it here, because my other system, which is based on Average Daily Range is more complex.
Ok, you go to www.fxdd.com and sign up for a demo account. This is how you download the software. It's free. You can also use www.ibfx.com if you prefer, but FXDD includes gold and silver charts. So that's cool. The spreads on gold are quite large, because the Illuminati want to discourage people from trading gold. But you can have some fun with it. A demo account is really just a video game!
NOTE: Spreads are how you pay for each trade. In stock trading, you pay a fee for each trade. In forex, you pay a spread, which is usually about 3 extra pips between where you buy and sell. On the gold chart the spread can be like 80 to 90 pips. Which means you have to gain at least 80 to 90 pips just to break even on that trade. Then again, it has a huge daily range, so it's more likely to cover that spread than any of the "other" currencies. Gold is actually paired with the dollar, so we would consider it to be a currency pair. USDXAU is gold. USDXAG is silver. The EURUSD is the euro vs the dollar, and it always has the smallest spread. It's always 2 pips, which is why to start out, you use the chart for this pair. Seems like it's the pair they want people to do most of their trading with.

Ok, so here are the indicators I use. The main thing in trading is to have a system. Then you run that system. NEVER deviate from the system. You use a system that has proven to be effective over time. So you don't deviate from it, because that's how you lose. The best way is to create your own system, using indicators that work the same or a similar way to the way you naturally think. There are hundreds of different indicators to chose from. You really don't need many. Just pick maybe 3 or 4 or 5 to start with and go from there.

Ok, the main indicators in this system are the Moving Averages. The yellow line is the 7 period moving average, the red one is the 14 period moving average and the blue one is the 21 period. Since I use a 30 minute chart, each period on the chart is 30 minutes. So each candle represents 30 minutes of trading.

When the yellow line (7 period moving average) crosses over the blue line, that is when I will enter a trade. But there has to be another confirming signal. I use an ADX oscillator. So, when the yellow line crosses over the blue AND the ADX is over 25, then I will enter the trade. These are the only two signals I use for this system.

The moving averages turning over like that signals that the direction of the trend is changing. The ADX is a volatility indicator. The red line tells you if there is a trend in place. If it's above 25, then price action is NOT flat. That means you can enter a trade, in whichever direction the yellow line is headed. There are three lines in the ADX oscillator. The red one simply represents volatility. The other two lines represent the direction. One represents movement upward, the other represents movement downward.

Now, you enter a trade when the yellow line moves over AND when the ADX is over 25. Pretty simple isn't it? Now is when it gets more complicated.
Look for the average daily range. This is how far price action is likely to go in a single day. This is the Average Daily Range indicator I use. There are other ones that are more fancy. You can click on these charts to enlarge them. The vertical hashed line is the beginning of the "day" as far as trading is concerned. It's the beginning of the Asian period. After the Asian period, the London period starts, then New York. That's a full trading day, which runs 24 hours. Anyway, the day starts where that vertical white hashed line is, then the average daily range (which is based on 14 periods, one period being one day) is represented to the upside by the orange line above the price action, whereas the average daily range to the low side is represented by the orange line below. On average, we can assume price action will go as far as these lines, one way or the other.

Next, we have pivot lines. These lines represent areas where price action tends to turn around or where price action tends to stagnate. They represent areas of support and resistance.

These red white and blue lines represent daily, weekly and monthly pivots. I forget which are which. LOL. The longer period ones tend to be more significant. To these pivots, we can add centennials. Centennials are even numbers which have psychological significance.
Centennials represent every 100 pips. The blue ones represent the 50th ones in between the red ones. They work just the same way as pivots. They function as support and resistance. They will support price action when it is moving down, and when it is moving upward, it will provide resistance. Price action will have to have sufficient volatility to get through these lines.

So, you enter a trade. When you enter a trade you will buy one "lot." This is like buying one stock. You can buy more. But let's say, given our money management and risk management, we want to buy small lot numbers. What I do is I look at the average daily range. Then I look at the levels of support or resistance between where the price action is currently at and the daily range. Let's say there is one pivot point and two centennials. You don't have to count the blue centennials, they aren't as strong. But let's say there is a red one and a blue one and we will count the blue one. So that's three. What I would do is I would buy FOUR lots. I would buy one for the pivot line, one for each centennial, then one for the average daily range. These would represent my four targets for this trade.

So now I have entered the trade with FOUR lots. At the first level of support (let's say price is moving downward) we will want to exit part of the trade to lock in profits. But what I do is I halve the amount of my lots each time. I do not sell one lot at each level. I decrease my lot size by half at each level.

So I will have four levels of support I will have to cross, before I hit the average daily range, which is my final target. Let's say the first level is a pivot line. At that level, I will have FOUR lots. Here I will exit half of the trade, meaning I will take profit on TWO lots, and I will have TWO remaining. At the next level, let's say its a centennial, I would exit half of the remaining trade. Since I now have TWO lots, I will take profit on one and I will have one lot left. AT the next level, I would have one lot left, so I would sell half of it. Then I would have .5 lots. The next target would be the average daily range, and I would exit the trade there. There are other ways to exit the trade, but I won't get fancy here.

As you can see, this system is really not complicated at all. There is another indicator I have been using, which is a Tom DeMarker indicator.
You can see the green hashed line and the red hashed line. They cross. If price action breaks upward past the green hashed line, odds are it will go up and hit that short green line towards the top of the chart. If it breaks downward past the red hashed line, it will tend to go down and hit the short red line below. These are all calculated based on price action. You can learn about Tom DeMarkers here.

I'll usually wait for price action to break out of Tom DeMarkers before I will enter a trade, and I will tend to count the upper green/lower red lines as extra levels of support and resistance. Not sure if I'm gonna keep using them, though. Not sure they have much relevance for this system. The target lines probably do moreso than the breakout lines. Plus my indicator has a really irritating alarm that goes off when price action breaks out.

The only other issue is that of stop losses. Whenever you enter a trade, you should ALWAYS have a stop loss. However, there are different philosophies as to how to calculate them, or where to put them. Stop losses will automatically exit the trade if price action moves against you. I can write more about stop losses at another time, as I'm somewhat undecided as to how I'm gong to plot them in this system. You can use a set number like 34 pips behind your entry, which I used to use on the EURUSD pair. You can put it behind a recent low/high (depending upon the direction of the trade) or you can put it behind the recent high/low of the last candle. You can also use the pivot lines or some other level of support/resistance.

The important thing is to ALWAYS ALWAYS ALWAYS have a stop loss in place whenever you enter a trade. You just never know when something weird is going to happen. A couple weeks ago North Korea fired missiles at South Korea and the Japanese Yen went crazy. You don't want to be caught in a situation like that without stop losses.

If price action moves in your favor, you can move your stops up. There is even an automatic setting for trailing stops. This means that your stop loss will move with price action. Let's say you set it at 20 pips, it will follow behind price action by 20 pips, but then when price action turns and moves against you, it won't move farther away. It will stay where it has moved, then stop you out of the trade if price action moves back those 20 pips.Here's a chart with all the indicators on it. If anyone wants I can post charts with examples of trades, and show where I'd enter and what I'd do. I can give examples of stop losses too.

Not all of these indicators come with the software. I can show you where to get them and how to set them up on your charts if you want. Otherwise there are some great forums, such as Forex Peace Army. Anyway, have fun with it. That's the most important part!