On the Trader's Blog you've heard us talk plenty about how to simplify your trading. As a matter of fact, you've heard Adam preach about keeping it simple over the years. Today we've asked Bill Poulos from Profit's Run to share with us how he keeps his trading method simple by using a simple indicator that we could all benefit from. To find out more about Bill Poulos visit his website here.
One of the problems that many traders run into is trying to find the perfect combination of indicators that will lead them to the perfect trading method. Not only is this a problem for new traders but we find that many experienced traders continue to over complicate their charts with too many indicators. They often think that the more indicators they can get on the chart the more successful they will be. This is usually not the case and only leads to more confusion on the part of our entries. The concept of keeping things simple works especially well when applying it to our trading strategies. The key for many trading methods is to simply know the trend of the pair and then know when to buy or sell that pair.
With that being said, I wanted to spend a few minutes discussing one of the most useful indicators that a trader can use. Not that this is the perfect indicator, but it is one that every trader should use to help them know where the market may be going. The indicator that I'm referring to is the Simple Moving Average. With the idea of keeping things simple, this indicator even has the word “simple” as part if its name.
So with the idea of keeping things simple, lets talk about how this indicator can help us with our trading. There are two things that we find useful when looking at the Simple Moving Average. The first thing is to look at the direction it is heading. This will tell us that the momentum is either going up or going down for the time frame we are looking at. This momentum should show us the direction we should be looking to trade. For example, if the Simple Moving Average is heading up then we should be looking to buy the pair. If it’s moving down then we would be looking to sell the pair. This is a pretty simple concept that many traders seem to ignore. The second thing the Simple Moving Average can show us is where there may be support or resistance. When looking at this indicator you will find that the price has a tendency to want to move away from it, either as a bounce off of it or a break through it. In either case it will give us an idea of what the price wants to do.
Using the Simple Moving Average as part of our trading method will help us with two of the most important things in charting. Those two things are knowing the trend and knowing support/resistance areas. When we know these two things we can then begin to look at entering into our trades based off of our entry rules. These entry rules can be based off of price action or some other indicator the shows us it would be a good time to enter the trade.
Let's see how we can use this indicator to know the direction to trade. When looking for entries into a trade we want the following alignment of price and the Simple Moving Average.
Buy: Simple Moving Average pointing up and price above it.
Sell: Simple Moving Average pointing down and price below it.
When we are in this alignment we know the chart is in a place to enter a trade based off of our entry rules. Remember, we want to know the trend and trade with that trend. Even if we don't get in at the perfect time the trend will generally push us in the direction it is heading.
Finally, with the infinite periods we can choose from, which is the most effective Simple Moving Average to use? This is a great question and one that you will get many answers to. You will see traders using anything for a 5 period to a 200 period average with the whole numbers being most commonly used such as 10, 20, 50 etc. In most of the methods we use, the 40 period Simple Moving Average is an effective tool to help us with our trades.
Regardless of the period we are using, keeping things simple by using an effective indicator like the Simple Moving Average can keep your charts easy to read. In addition, you will be entering in the correct direction every time you place your trades. Remember, more is not always better!
Good Trading,
Bill Poulos, Profits Run
To find out how you can use these uncomplicated charts to predict with a high level of accuracy, which way any of the 6 major Forex pairs are headed in the next 8 hours, take a look at my new private training website here
To Bill Poulos
I found your Forex training video by way of the Market Club post by Jeremy "Simplifying Complicated Charts".
I noticed there were video #2 and video #3, but was unable to access them.
Can you provide me with the means to access these training videos on trading on the Forex market?
I have decided to get into trading on the market and am in the process of educating myself before I commit any money.
Thanks for your consideration.
I have always used the simple moving average. Now I use several time levels of simple moving averages on the same chart. I settled on times corresponding with the natural resonance of the specific stock I am following with at least a double and a half time average on the same chart. For QQQ ETF a 60 minute SMA plus a 60 minute weighted MA with a 30 minute and a 120 minute simple moving average is used. The weighted moving average responds early and confirmed by the simple moving average. The half and double averages keep it within a trading range. In time of volatility I can readily see a dangerous situation by comparing these averages. I keep a 200 day moving average to see the long term trends. My platform gives me a multiple MA on the same chart color coded for instant recognition. I also superimpose a Bollinger Band at 3 SD on the 60 minute simple moving average. None interfere with the others and all are color coded for instant distinction. At 3 SD the BB shows 99% limits of each stock I follow. I have nick names for the lines like red line, green line, caution line, sky line, fishing line and dead line. The weighted MA is the fishing line as if with a lead weight. The analogies implied are fun and allow me to discuss them with my wife who assists me in the interpretations.