People rarely succeed unless they have fun in what they are doing - Dale Carnegie

Transcription

1 Foreword People rarely succeed unless they have fun in what they are doing - Dale Carnegie My trading journey is what one call as a roller coaster ride. I was not trained in finance. I was trained in the Information Technology field. Upon graduation a friend of my girlfriend told me about his experience in trading stock. Somehow it unearthed a curiosity in me to learn as much possible about trading stocks. Like all newbies, I bought trading books and dove into the stock market. Within a short 6 months, I lost close to USD 20,000. I was bewildered, how could this happen. I then studies about trends and went to look for stocks where were trending. In about 6 months I managed to get back almost all what I lost. This particular event started made we want to study more into trend trading. My style of learning is to learn how trend traders think. I bought books which talked about how great trend traders think and behave. Mimicking them is one certain way you would not go wrong. If you are into trend trading, you will definitely come across the term turtle traders. The brain child behind turtle trading is nonother than Richard Dennis and William Eckhart. The system taught by Richard has been published in no less than 2 books. In the short 5 years, the turtles netted an aggregate profit of USD175 million. His turtle s (a nick name for his traders) has gone to achieve much more after his experiment ended. They tweaked the original trading system but kept the essence of trend trading. Until today most millionaire traders are mainly trend traders. Thus by focusing your main trading system into trend trading is something all traders should consider. One particular event stuck out like a sore thumb and taught me to focus on trend trading. I worked as a market analyst in a fund and during one particular conversation I had with the chief trader. I asked him who do you think is the best trader you have ever seen? He said he has never met the trader but this person or organization will always make one entry for the particular instrument of trade and exit about 8 months to a year later. The trader would ride the whole trend move and they have been successful for years. Now this is really cool. Thankfully, the market do not care if you did go to school or not, tall or short, thin or fat, young or old, athletic or not, it only reward people who has perseverance and a sensible approach in money management. This is one of my ebook about trend. I really hope that the ideas presented here would benefit you as it has benefited me. - Justin Khoo

2 A Simple Moving Average that you never thought of First of all to the newbie s, SMA here means Simple Moving Average. The simple moving average that is calculated by adding the closing price of the security for a number of time periods and then dividing this total by the number of time periods. Now anyone can just give any number and say that it is the trend indicator. First of all, I do not use moving average like what you usually see from the books or articles from the internet. Furthermore I will justify why I choose 21 as my simple moving average and not some statement where it is a value generally used by big funds. The explanation: In a day, you have 24 hours. In a trading day, you will see that there are roughly 3 hours of market non activity. Thus for a more accurate average of the market, we use 21hours instead making it 21sma In a month, there are 30 days in general. Take away the Friday and Saturday you have in a month which totals to 8 days, you have 22 days. Take away the hours of non market inactivity in a day you need to take another day off, thus giving you 21days. So you see, this is how I get my number. I use logic. When you use logic, you would see that the value is widely usable for all types of instruments which we use to trade. We do not need to use specific SMA values to tackle different instruments and also different time frame. It s a one value for all. With the conclusion derived, I then use the 21sma as the true average price of the hour, month or year practically covering all time frames. So by studying the 21sma, I am able to call the trend of the period. A simple way is to see the angle of the 21sma.

3 Uptrend: In an uptrend, the 21sma would be slopping upwards. Usually you would see a steady uptrend have a gradual upwards slopping moving average. Majority of the prices would be trading above the 21sma during an uptrend. Unless there is a strong close below the 21sma, the uptrend will still continue. A strong close here would constitute a consecutive close below the low of the candle which first closes below the 21sma. Example of strong close above

4 Downtrend: In a downtrend, the 21sma would be slopping downwards. Usually you would see a steady downtrend have a gradual downwards slopping moving average. Majority of the prices would be trading below the 21sma during an downtrend. Unless there is a strong close above the 21sma, the downtrend will still continue. A strong close here would constitute a consecutive close above the high of the candle which first closes above the 21sma. Example of strong close above

5 Range: A ranging market would see the 21sma flat line. Prices would close above the 21sma for a few periods before repeating the same price action by closing below the 21sma. During this period of time one should stay aside or go to smaller time frame to take advantage of the smaller time frame trends. More detailed example of the strong closes above or below 21sma. A B C D E F G H From the price action, we can see that the price is in an uptrend. At candle A, price first close below the 21sma. The next candle however could not close below the 21sma and price continued to trade higher. Price at candle B again close below 21sma. However the next candle and also its consecutive candle fail to close below the low of candle B. Naturally price would trade higher. This scenario is repeated at candle C, D and E. At candle F however the relationship changed. Candle F closed below the 21sma. The next 2 candles marked G and H saw price close below the low of candle F and this effective ended the uptrend relationship of price and the 21sma. This price close relationship is just a guideline on how price and 21sma behave. You should not use this understanding solely to make trade decisions.

6 Type of price action you will see in a trend The above chart is the chart of the EURGBP. The EURGBP has been in a prolong downtrend. To know if price is in a trend and in this case a downtrend, we would need to see price rejecting the 21sma and continue to trade lower. Now this is a quick way to detect if the trend is going much lower in the case of the EURGBP pair above. Here are the steps for a downtrend: 1) First you have to check where the price first broke the 21sma from above to below. 2) Then we need to mark the lowest point of the price before price rejected 21sma.

7 After plotting the charts according to the methods which I mentioned earlier, you will get this. The red arrow areas are areas which price recorded the low just before price tested the 21sma. The grey horizontal lines are the lows of the price. So to see if this trend has a chance to continue, you will need the price to close below the low of price action which tested the 21sma. Price low Price close below the low and downtrend continues

8 Here are the steps for an uptrend: 1) First you have to check where the price first broke the 21sma from below to above. 2) Then we need to mark the highest point of the price before price rejected 21sma. I have plotted here the uptrend of the GBPUSD chart according to the methods which I mentioned earlier and I have this. The red arrow areas are areas which price recorded the high just before price tested the 21sma. The grey horizontal lines are the highs of the price. So to see if this trend has a chance to continue, you will need the price to close above the high of price action which tested the 21sma. Price close above the high and uptrend continues Price high

9 How long will the trend continue Personally like to trade during the first reject for an uptrend and the first reject for the downtrend. After a few rejects, the trend s momentum becomes weaker. Usually I would not continue to trade fresh trades after the third (3 rd ) continuous reject of the 21sma. Let s look at the example below. Buying in an uptrend 3 rd 2 nd 1 st Price rejected the 21sma twice perfectly. After the 3 rd rejection of the 21sma, price momentum died down and price could not close above the high of the 3 rd rejection. Price then continued trading sideways. There are times which price would reject more than 3 times. However you just need to see the momentum after each rejection to get a rough idea. The other areas which you also need to study are the resistance areas. Buying near resistance areas simply does not present a good risk and reward ratio.

10 Selling in a downtrend In this example, price rejected the 21sma perfectly and the price sold for a while. The second (2 nd ) price rejection however saw price momentum decrease. The same price action was seen on the third (3 rd ) reject. At the fourth (4 th ) reject, we saw price not able to close below the low of the previous low, thus we cannot continue selling from this place as price action does not confirm further weakness in the trend. Detecting the end of the trend Diagram A

11 Diagram B Have a good look at diagram A and diagram B. What do you see? The answer. When prices actions shows the 3 rd reject and onwards, the price momentum starts to wane. This is what we usually call as overbought conditions for an uptrend and oversold conditions for a downtrend. The best place to take advantage of the buy and sells are just after the first (1 st ) reject areas. The second (2 nd ) reject carry risk if we continue to trade in that direction. However the third (3 rd ) and fourth (4 th ) reject carries the highest risk if we continue trading to the direction. For detect where the price will find support and resistance, do use the basic understanding on price support and resistance. When you understand support and resistance, you can never go wrong, as price action is the basis of all trading. It triumph over all indicators. Conclusion: The sharing above is about understanding moving averages and its habit. Via the habits, you get a clear picture of the chart. When the chart tells you stories, this is where you start to identify the financial instrument movement in a clearer manner. What I presented is not the final one. There are more and one has to understand what was presented here to understand the next level. In the end price action trumps all.