Ty Young - full

Contents

Dow Theory

Anyone who’s ever purchased a DVD knows the difference between a “wide screen” production and a “full screen” production. To elaborate; when a movie is viewed on the television which is modified to fully fit your screen, it looks something like this:

When viewed at the theater, we see more of a panoramic view, such as this:

In more visual terms, we have the difference between this:

And this:

Hi, this is Ty Young with Surefire-Trading.com and today I will be discussing the basic principle behind the Dow Theory. Not unlike the examples given above,

In A Nut Shell

…..the Dow Theory is a line of thought that takes us outside the proverbial “box” – or outside mainstream economics; a school of thought which has come to be used for developing the heart and soul of technical analysis. Over-simplified, his principle best describes the markets in this way:

The market has three movements….

The main movement”, which is better described as the major trend.
The “medium swing”, where the market reverses its direction for a short period of time, which many have come to recognize as Fibonacci retracements.
And the “short swing” , which are contrived of minor fluxuations in the market.

Fundamental traders like to qualify and explain market fluxuations with reasons that stem anywhere from short-term manipulation of the markets to world economic catastrophies.

As technical analysts, however, with the help of charts, we attempt to gain profits during bullish and bearish swings, simultaneously, within the confines of any major market trend by analyzing “past” price movement.

As we apply the Dow Theory to our technical analysis, we find that its application is best served if displayed on –

Multiple Time Frames.

In other words, we transition our charts from a “fullscreen” perspective to a “widescreen” perspective. For example, a 60-min. chart when decreased in size, expands from this perspective:

To This Perspective:

Both charts are 60-min. charts – but a broader view of the market is provided.

Now, what if we could display our charts in a way that would broaden our perspective in a far greater way?

Follow me here:

Let’s assume you are about to take a roadtrip from Paris, France to Rome, Italy. Initially, we wouldn’t pull out a map of Paris or of Rome, would we? In order to get our bearings, we would open an atlas such as this:

As we approach the border of Italy, we would open the atlas to a different perspective:

And as we approached Rome, we would look for an even more detailed perspective…

Ultimately, looking at something like this:

This is what Multiple-Time Frame trading is all about….

Giving us a “major” trend, a “medium” trend, and a “short” term trend perspective – providing us with an uncanny ability to profit from bullish and bearish swings.

Looking at some charts below, we have a………..

4-Hr. chart
(downtrend)

60-min. chart
(downtrend)

15-min. chart
(downtrend)

All three are in a “downtrend”….Oh my, I think I’ll be looking for a short order….what do you think? :o)

But since I’m a “day-trader”, let’s add the 1-min. chart as well…

Now let’s enlarge each one, and add some indicators.

Analysis:

4-hr. chart: My EMAs (21,13,8) have been in a strong bearish sloping action, the MACD is below the zero line, and the RSI is not only below the 50 line, but it has remained below the RSI trendline (T/L). For some, watching the 4-hr. chart may have been sufficient for a short order, but since the Euro had been in a downfall for some time, it was important to me to see if the bears were weakening in their conviction…

therefore, the importance of the “panoramic” view.

60-min. chart: The EMAs remain in a strong downward slope, MACD and RSI remain intact….below the water level.
15-min. chart: And all these indicators are likewise.
1-min. chart. Now here was the key to getting the best entry possible for this trade. The first three charts have each of the indicators on the BEARISH side of the market, correct? So, I know I’m looking for a short entry. However, the question is, “Do I want to enter the market while it is falling, or do I want to enter on the retracement; which is going to provide me with a greater profit? The obvious answer would be, “On the retracement”.
And since all three time frames are in a bearish mode, I drop down an additional time frame….looking for “bullish” strength….yes, I said BULLISH strength. If I need the market to retrace from a bearish position, which direction would that be? Bullish, of course.

The 1-min. EMAs are in a bullish slope, and each of the indicators is in overbought (O/B) territory.
This strategy gained me about 200 pts. Had I not waited for the retracement, I would have profited 50 pts. less. Also, by waiting for the pullback, I shortened the distance between my entry and my protective stop (P/S) by 50 pts…decreasing my risk….pretty good, huh?

Take time to check out the video…

With Surefire-Trading.com, this is Ty Young. Reminding you to, “Read the charts”.

Moving Averages

Hi everyone, this is Ty Young with SurefireTrading.com.

In our last lesson, we found that Moving Averages are the building blocks of the MACD: remember: Moving Average Convergence Divergence; and as such, we find that they also can be useful tools in confirming our entries.

There are two distinct ways that I make use of Moving Averages. One is for higher time frames; such as, Daily, Weekly, and Monthly charts. The other is for intra-day trading, which are the 1-min. through 4-hr. charts. In this lesson, I will be discussing the latter.

But first – Let’s check out the preliminaries.

MAs are probably one of the most popular trading tools utilized by the technical analyst, which are often broken down into several categories; i.e., the Simple Moving Average (SMA), the Exponential Moving Average (EMA), and the Weighted Moving Average (WMA). And there are other deviations, such as the Double Exponential Moving Average (DEMA). In fact, indicators such as Envelopes and Bollinger Bands find their basis in the manipulating of Moving Averages; however, since the two most popular Moving Averages are the SMA and the EMA our lesson today will concentrate on the use of these two.

Calculations

Calculating the average price of a particular asset over a specific time period forms the Simple Moving Average.

Let’s assume for a moment that we are trading the 15-min chart and we decide to use a 3 SMA to aide in our decision-making. What exactly is taking place? What precisely is the charting software calculating behind the scenes? The software is adding the closing prices of the present plus the past two (15-min.) time periods and dividing the total by 3….very simple, huh? I guess that’s why they call it a “Simple” Moving Average….LOL.

As each new bar or candle appears, the most recent 3 candles are used to recalculate the present SMA; discarding the closing price that is farthest down the line. It looks like this:

1.5531 + 1.5529 + 1.5527 = 4.6587

4.6587 is then divided by 3 which equals 1.5529.

The 3 SMA line is then pinpointed by the software where the 1.5529 price registers on the chart.

Let’s say the next candle closes at 1.5555. The initial price of 1.5531 would automatically be dropped from the calculation and the most recent three candles would be recalculated to look like this:

1.5529 + 1.5527 + 1.5555 = 4.6611

The quotient of 1.5537 would then be plotted on the chart. The 3 SMA indicator would instantly move from the position of 1.5529 (as previously calculated) to a position of 1.5537 (the present calculation). Since 1.5537 is a greater number than 1.5529, the charting software would interpret this calculation as a move in a positive direction. It would then display the SMA as an upward sloping line – telling us that during the last 15-minutes the bulls commanded the market.

As the market continues to move, every 15-minute period is recalculated displaying a continuous line that visually provides us with a means of determining who is dominating the market. As we can plainly see on the chart below, despite the whipsawing movement of the Moving Average, the indicator is clearly telling us that the bulls are controlling the market.

Despite its usefulness, the SMA has a minor flaw (well, to some of us, it’s not so minor) – that is, its apparent delay in responding to price action, which is why it is considered to be a “lagging” indicator. Even though the EMA lags as well, by giving greater importance to the most recent prices in its calculation than that which is attributed to the earlier prices, we create an indicator that responds more quickly.

For you mathematicians, here’s the formula:

EMA = [S * (C-P)] + P

S = Smoothing Factor

C = Current Closing Price

P = Previous Closing Price

The Formula for the Smoothing Factor is: S = 2/(1+N)

N = Number of days for EMA

I don’t know about you, but I’m thankful I have charting software doing my calculations :o)

Looking at the chart below, I have placed a 21 SMA (red) and a 21 EMA (blue) together to provide a comparison.

Practically speaking, though the EMA is calculated differently than the SMA, as we can see, it is applied to the chart in the same manner as to indicate the strength and weakness of the Bulls and the Bears.

Below, we see a chart with a 5 EMA of the High and a 5 EMA of the Low providing us with an interesting channel depicting the current trading range. Remind anybody of another indicator we recently covered?

In addition to these configurations, there are as many combinations that can be used when trading with Moving Averages, as there are traders who use them. I recommend experimenting with many variations to see which suits your trading style and the markets traded.

Now, although Moving Averages can be manipulated in a variety of ways, I will be using the Closing prices as opposed to the Highs, Lows, or the Opens for our examples. And by understanding how they respond to price, we begin to grasp the importance of such an indicator as a “stand-alone” Trading System or more so – as a confirming tool.

Deficiencies with Moving Averages

The most popular method of using Moving Averages is to position two or more MAs, of different size with the intention of entering the market as one crosses above the other. However, if traders understood more of what the “crossing” represents, they would be less inclined to use this tool in such a way.

And to make my point, I ask the question, “Isn’t the primary purpose of utilizing any indicator to determine who is dominating the market?”

The point at which two EMAs begin to cross depicts a balance of power – not domination. It is imperative that we interpret the “moving” of these Averages in such a way as to inform us who is beginning to take control of the market at any given time. In order to accomplish this, we must wait for the MAs to develop a more definitive signal.

Also, as stated earlier, another discrepancy found with the crossing of Moving Averages is its lag-time. That is, by the time the EMAs have reversed and completed crossing forming its sequential order, the price has generally advanced significantly – even to the point of reaching the shaded area, as in the chart below.

Now, in this example, this would not have been a big problem because there was plenty of movement below the shaded area to capture a small profit from the market (which is not always the case).

This leaves us with only one small (significant) problem – the Protective Stop (P/S). With such a delayed entry, had the market gone against us, the loss would have been unnecessarily grave. Notice the span between the entry and the previous high. I cannot stress this enough, it is imperative that we wait for the EMAs to align themselves in such a way as to “decrease” the gap between our entry and our P/S.

This can be accomplished by one of two ways:

Strategy # 1 (conservative)

On the chart below, I have placed a 13 EMA (blue), a 21 EMA (green), and a 60 EMA (red) of the closes providing us with three entry opportunities.

As the EMAs begin to cross in a bullish manner, we have only the beginning of the signal. Let’s enlarge this chart and zero in on one of these trades.

Since the EMAs are in a bullish sequential alignment and showing upward slope while beginning to expand, I’m looking for an opportunity to enter long on a retracement.

……………Let’s walk through this trade together:

Candle (A) closes below the 60 EMA, while the 13and 21 EMAs remain above the 60 EMA.
At the open of Candle (B), I place a buy/stop order to be triggered at the break of the high of Candle (A).
Candle (B) rises and closes above the 60 EMA but does not break the high of candle (A) – no action is taken.
At the open of Candle (C), I place a buy/stop order to be triggered at the break of the high of Candle (B).
Candle (C) once again closes below the 60 EMA, with the EMA alignment remaining intact but Candle (C) fails to break the high of Candle (B) – still no action is taken.
Since the EMA alignment remains intact, at the open of Candle (D), I place a buy/stop order to be triggered at the break of the high of Candle (C).
Candle (D) breaks the high of Candle (C) and I am subsequently in the market on the long side.

As we look at the example below, take note of the fact that we have reduced our risk by shortening the distance between our entry and our P/S. Had we entered after the initial cross (shaded area), we would have increased our loss by thirty pts.

Let’s look at some more examples……

On the chart below, an entry based on the crossing of the EMAs would have positioned us so high in the market that we would have easily been stopped out as one of our Protective Stops were triggered.

And likewise with this chart below.

By now, it should be obvious to you that entering on an EMA cross, though profitable at times, is not what I would consider a “high probability” trade.

So, let’s see what we have learned…….

So far I have shown the mechanics of the EMAs in the lower time frames; now let’s add an indicator, the RSI, as a confirming tool. As we take a look at the next four 60-min.charts, see if you can determine why the shaded areas are high probability entries?

If you’re thinking, “Entered on the retracement”, you are absolutely correct.

And if you place your Protective Stops above/below the most recent high/low, your Stops will be much closer to your entries, which will minimize your loss if the market should move against you.

Now take a look (below) at the same coinciding areas but move up to the 4-hr. chart.

What do you notice about the position of the EMAs and the RSI (or – use your favorite indicator for confirmation)?

In each case, the RSI was either on the appropriate side of the 50-line or the RSI trend line had been broken – or both. And the EMAs were positioned with distinctive slope and sequential order.

However, did you notice how all three EMAs on the previous chart (entry 4) had not come into “full” alignment? I will deal with that in Moving Averages Part 2; check it out.

For SurefireTrading.com, this is Ty Young, reminding you to “Read the Charts”.

Moving Averages Part 2

Hi everyone, this is Ty Young with Surefire-Trading.com.

In our last lesson, MA Method Part 1, we demonstrated how Moving Averages could be incorporated to safely initiate a more conservative entry at the lower time frames. As you may remember, due to the lagging effects of the EMA, our primary strategy consisted of using retracements to signal high probability trades.

Though this is a great way to trade for those who like to capture quicker, yet, smaller gains from the market, there are those who prefer to remain with a trade for longer periods of time – extracting larger gains. This lesson addresses such a strategy.

Now, don’t get me wrong, the retracement approach also can be used to signal entries at the higher time frames, which I use frequently; however, generally speaking, if you wait for an EMA retracement on a long-term chart, a greater portion of your potential gains can or will be missed entirely.

And though I would love to say the lagging effects of the moving averages are diminished with long-term trading, they are not; in fact, they are increased. So, if we are to be successful, we must contend with this discrepancy at this level as well. And with this in mind, we will utilize the EMAs with a slightly different strategy then that which was described in MA Method Part 1.

In addition to our Moving Average strategy, we will make use of other conformational tools in our arsenal as well; i.e., trend line breaks and other favorite indicators, such as, the RSI, MACD, and Bollinger Bands, to confirm our entries and exits.

So, let’s take a look at this Weekly chart below where I have entered two sets of three Exponential Moving Averages (shorter and longer MAs for greater perspective –

• Both sets of averages are favorites of many traders: 8, 13, and 21 and 50, 100, 200

• The Bollinger Bands (a setting of 20 with a standard deviation of 2)

• And the RSI with a setting of 21.

Now, since all the EMAs in this example are in bullish alignment (including the longer averages) on this EUR/USD chart, it is obvious that the market has been in bullish territory for some time. So an entry “with the trend” on this retracement (the shaded area) would have been an easy read. So let’s assume that at this moment we are long and are waiting for our exit signal and a possible re-entry point – long or short.

Take another look at the previous chart (below) and see if you can see the exit signals.

The first signal that rings true is our basic Bollinger Band Reversal signal. And depending on your level of patience and aggressiveness, an exit at any one of the three candles would have been good exit points – for a terrific gain.

Or an exit at the trend line breaks would have left us with a healthy gain as well (below).

Now, here’s where we shift gears – our re-entry. We have found our exit and are looking to re-enter the market, which is in a strong bullish trend.

What do we do? Do we play it safe and…….

• Wait for another EMA retracement and re-enter long?

• Wait for the EMAs to cross in a bearish alignment and short the market at the bearish retracement?

Or…………..do we look for something a bit more radical?

If we had waited for either of the two previous possibilities, we would have missed a gain in excess of 1400 pips.

In fact, had we waited for the EMAs to “bullishly” realign themselves with their subsequent retracement to re-enter long (in line with the major trend), our missed “round-turn” opportunity, would have amounted to over 4000 pips….YIKES!!!

Sooooooo……what “high probability” trade do you see in the previous chart (below) – long before the EMAs come into alignment?

Well, I can name several. Let’s number them…..

The first one doesn’t even include the EMAs – and had we been distracted by (or focused on) only the EMAs we would have missed a great shorting opportunity.

• A break and subsequent retracement to the price trend line; coinciding with the RSI trend line break as the RSI continues to weaken.

Second opportunity: using the trend line breaks as a warning signal (below), we have……

• Two closes below the 8 and 13 EMA (shaded area) – showing weakness.
• Retracement to the price trend line and subsequent close below the 8/21 EMAs. Notice that the EMAs are still in bullish alignment and only the 8 EMA is beginning to show a downward slope.

With this strategy, you will find that your charts often come into alignment before the EMAs have time to cross – I repeat, “Before the EMAs have time to cross.”

So, in essence, we are using the EMAs as support & resistance. An interesting note: I often find that Exponential Moving Averages frequently correspond with Fibonacci support & resistance levels.

Remember, we’re not waiting for the EMAs to cross or even come into alignment.

• We are, however, looking for price to close below/above one of our EMAs – with or without change of slope – the lagging effect often creates such a charting signal.

—————OR——————

• We are looking for any one of the EMAs (usually the shortest one) to begin to change its slope with a subsequent close across its line.

—– Remember, we initially had a “wake-up” call to such an entry with the price and RSI trend line breaks. So, the operative word here is, “CONFIRMATION”.

Also, take note – that frequently, once in the market, you will find that you will give back to the beast much of your profits if you wait for the EMAs to cross or come into alignment.

So, let’s take a look at another example.

On the GBP/USD chart below, we had a great shorting opportunity back in March 2008, which was signaled with a 50/100/200 EMA setup.

We have a nice trend line break on the price chart, the RSI, and the MACD, while the EMAs remained in bullish alignment. So, why is this a shorting opportunity?

Let’s enlarge the chart and take a closer look. In addition to the trend line breaks…………

• We have several closes below the 50/100 EMAs (showing weakness).

——————-AND——————

• We have a pullback to the trend line on the price chart, while the RSI remained below its trend line, which coincided with the RSI predominantly remaining below the 50 line.

———————-AND———————–

• We have the MACD remaining below its water line.

For us aggressive traders, shaded area (B) (above) was a terrific entry point.

A conservative trade – a close below the previous lows or a break of the candle that closed below the 200 EMA was also a good conservative trade.

The USD/CHF also gives us a great signal with its 13/21/55 EMA setup.

On this weekly chart, we take note of the obvious trend line breaks. But as we enlarge the chart, we can see more clearly the close above the 21 EMA (no noticeable slope or bullish alignment). Again, a close above the 21 EMA is break and close above a line of support.

******* By now some of you should be asking yourself, “Sometimes he uses an 8/13/21 combination, sometimes a 13/21/55 combination, and at other times he uses a 50/100/200 EMA combination.

How do I know when to use what?”

Great question – and to answer it, let’s take another look at those initial charts ————— but this time take note as to which EMA is creating the line of support or resistance.

On this EUR chart with the six EMAs, the candles are following parallel to which EMA? The 8 EMA, right?

That moving average then becomes my area of concentration.

On this GPB chart, the 50 EMA is creating the line of support.

And on the CHF, the candles are running parallel to the 21 EMA – this moving average then becomes our central focus. See how many times the price kept resisting the green line?

Combine these EMA strategies with your favorite indicators and you have a winning team.

Moving Average Convergence/Divergence (MACD)

Hi, this is Ty Young with Surefire-trading.com and today we will be discussing the Moving Average Convergence/Divergence (MACD).

Originally, Gerald Appel’s MACD was composed of a default setting (12,26,9) which displayed two lines. One line, the MACD, is the difference between the 26-period EMA and the12-period EMA. When an additional EMA (signal line, also known as the trigger line) such as the 9-period EMA is added to the mix, we have an indicator that reveals over bought (OB) and over sold (OS) conditions as well as providing us with buy/sell signals. This is accomplished through divergences or crossovers.

The general rule of thumb is, when the MACD rises above the signal line the bulls are in control. And conversely, when the MACD drops below the signal line, we look for an opportunity to sell. Greater credibility is given to the bulls/bears when the two lines cross above/below the zero line – conservatively speaking.

I say this because often times at OB levels, depending on support and resistance (S/R), Bollinger Band Reversal signals, Fibonacci, etc., the MACD can make a bearish cross (or in the case of the MACD Histogram – a bearish drop) giving great shorting opportunities despite the fact the MACD is way into bullish territory – the opposite being true for OS levels.

Knowing that lagging indicators can remain in OB/OS conditions for extended periods of time it is important to take note that these crossings provide us with potential entry signals; higher probability opportunities dictate that we look to other means for confirmation.

An added bonus is provided to us through the MACD Histogram, which gives us a visual perspective of the difference between the MACD (the difference of two EMAs) and the third EMA (signal line).

As with any oscillator, the MACD or MACD Histogram can provide us with possible retracement or reversal opportunities when divergence is visable.

Charts

In trading the Forex and currency markets, if you are more of a position trader, in order to limit whipsawing you will find it advantageous to use the standard MACD setting of 12,26,9 or longer. As an intra-day trader, I have deviated from the default settings by shortening the moving averages (10,22,5) in order to provide a more responsive indicator.

On the 4-hr. chart below, as the market began to drop we can see with Crossover (A), the MACD (blue line) moved below the signal line (red). In Crossover (B), as the price began to rise, the MACD moved above the red line. As the trend began to strengthen (bullish or bearish), the MACD pair crossed the centerline.

Also, take notice of the widening of the two lines. As with the Bollinger Bands, when the two MACD lines begin to widen or spread apart, this shows greater control of the dominant team (bulls/bears).

In the next chart, we have the MACD Histogram, which is contrastingly portrayed as bars. Similar to the MACD above, however, we see below that the bars of the Histogram cross the centerline as domination of one group weakens while the other group strengthens. In contrast to the MACD lines crossing, however, as the trend strengthens/weakens the bars increase/diminish in size.

In other words, as the bulls’ position weakened the bars not only diminished in size, they crossed below the centerline. Having crossed the centerline into bearish territory, as the bears take greater control of the market, the bars once again began to increase in size – which is nothing more than the equivalence of the MACD lines widening.

Now, when we put the two indicators together (below), we can easily see the relationship between the MACD lines and the MACD Histogram. The Histogram is on the bullish side of the zero line when the MACD (blue) is above the signal line (red) - and on the bearish side of the zero line when the MACD is below the trigger line.

Now, some charting services do not permit you to display the MACD as two distinct lines. As with the chart below, the MACD is displayed as a histogram (not to be confused with the MACD Histogram) and a signal line. Plainly stated, the two MACD lines have been substituted with histogram bars.

Instead of two lines (the MACD and signal line) crossing each other, the signal line crosses the histogram. So, we have three ways to determine dominance:

• The crossing of the histogram and the signal line (or, if you prefer, the crossing of the MACD and the signal line)

• The size (or length) of the bars (or, the widening of the red and blue lines)

• Above or below the zero-line.

Basically, we have the same information provided with each – just a little different perception. So, if you have a choice, what it really amounts to is (from your perspective) which picture clearly depicts what is happening with the price action - which version of the MACD speaks the loudest to you.

We have now seen that the MACD is “merely” a combination of several EMAs either converging with each other or moving away divergently from each other at some point – thus the description, “Convergence/Divergence” - which raises the question, “Why not just place a 12 EMA and a 26 EMA (standard settings) on the price chart?” If you want to experiment a little, you will notice that the MACD doesn’t lag anywhere near as much as an EMA crossover – the MACD moves faster. And in our business a faster indicator is always a plus. This is precisely why I DO NOT use EMA crossovers to enter or exit the market; if you haven’t figured it out by now, you will see in time that MAs are best used for support and resistance.

So, what do you say boys and girls - let’s trade.

Trade Example

In this 4-hr. chart bellow, as usual, the BBs provide us with the initial signal. What do we see?

In the boxed-in area (A), we have an opportunity to short the market with our classic BB reversal signal; demonstrated by a close above the upper band, subsequently followed by multiple closes within the bands.
The MACD is beginning a bearish cross.
And it is positioned in overbought territory. Shorting this market looks good doesn’t it?

Is this a “high-probability” trade?

Are we able to make a determination by this chart?

Remember, in order to get a clearer perspective, what is our first move? If this is, in-fact, a shorting opportunity – don’t we need confirmation of the trend? And we do this how? Or better asked, “Where?” Let’s go one time frame higher to the Daily chart.

What do we see?

We have a bullish trend
We have consolidation (market is ready for a breakout)
MACD has made a bullish cross
MACD has broken above the zero line into bullish territory

So, let’s expand the Daily chart in order to get an even greater perspective.

Now, what do we see?

Consolidation is obvious.
We have two closes above the upper band
And MACD indicates that the bulls dominate

Are we still looking for an opportunity to short this market?

NOT……………

We are looking for an opportunity to enter in a bullish direction. This would be a high probability trade.

Remember, we buy the dips and sell the rallies. So, if we are looking to go long, we are looking for what, specifically? A retracement. So, let’s go back to the 4-hr. chart and wait for a pullback.

The market has pulled back to the 20 SMA
MACD has crossed but remains in bullish territory

this is a good place to start. We will now drop down to a 60-min. chart to find our entry.

In the chart above, we see that we have a reversal signal; so, let’s pinpoint the entry.

In the chart above, we have an aggressive entry at the BB Reversal signal or we can enter more conservatively a few pts. above candle (C) – placing our protective stop, immediately below candle (D) or below the lower Bollinger Band.

As the price began to move in our favor (below), a trailing stop would move upward just below the lower BB….just as long as the MACD remained in bullish territory.

A Classic BB Reversal signal confirmed with a crossing of the MACD (below) brings my stop higher – or conservatively, I could exit at this point.

The next two hours prove, once again, the importance of protective stops (below). If you had not followed the market with a trailing stop, you would have exited at your original stop – with a loss…. a minor loss, non-the-less, a loss. As it is, sound-trading tactics provided us with a profitable day.

Now, when it comes to trading divergence, my personal preference is the MACD Histogram. The chart below is where we originally entered the market – except I have exchanged the MACD indicator for the MACD Histogram. As you may be able to see, in addition to the BB Reversal signal, we have great bullish divergence.

Relative Strength Index (RSI)

Introduction

Hi, this is Ty Young with Surefire-trading.com and today I will be discussing the Relative Strength Index (RSI).

History

J. Welles Wilder, Jr., a contemporary technical analyst, is well noted for his accomplishments as the designer of several technical indicators. Though the simplest of these to understand is the RSI oscillator, it is hardly the least in importance to the committed trader. In fact, next to the Bollinger Bands, this is a tool that I reach for most often. Though Wilder’s indicators were intended to function as “stand-alone” systems, I find greater confidence in using them as confirmation triggers. I never place my complete trust in any single indicator.

Technical

Wilder describes the RSI, along with his other indicators, in his book, “New Concepts in Technical Systems”.

The RSI is quite simple in its construction, calculated as follows:

However, every major charting service I have viewed calculates the formula for us.

Primarily, the RSI measures the internal strength (by comparing the current price against the average price - thus the term “Relative Strength”) of any given security (or in our case, currency) providing awareness to overbought (OB) and oversold (OS) conditions, as depicted on a scale of 0 – 100.

Generally, the rule of thumb is - when price rises above an RSI level of 70, it is considered to be OB; and below 30 is considered OS. Now, this is not to say that when the RSI rises above 70 that it is time to sell; nor, is it time to buy when it drops below 30 since markets can remain in OB/OS conditions for extended periods of time.

Also, because the RSI often leaves OB/OS territory and immediately crosses back into those levels, we want to exercise extreme caution when trading such signals.

In addition to the 30 and 70 RSI levels, the 50 RSI level is equally vital to interpreting the chart. Above the 50-line is generally considered bullish, whereas, below the 50-line is generally considered bearish.

Also, remember, the RSI is a lagging indicator; in other words, it follows the price (the price moves, then the indicator follows – it is NOT predictive). Despite popular opinion, we are not ‘fortunetellers” and there is NO crystal ball; so we must use other means to trigger our entries.

In the last lesson entitled “Bollinger Bands”, we briefly made mention of two methods of using the RSI as confirmation. Let’s delve into these a bit deeper. One of the most ideal ways is to look for divergence; the price rises to a new high, whereas, the RSI fails to break its previous high (bearish). Conversely, when price makes a new low, subsequently, the RSI fails to break its previous low (bullish). Divergence provides us with a signal that may lead to a reversal or merely a correction (be it ever so slight); also known as a retracement.

Another method is a RSI trend line break that corresponds to a trend line break (and subsequent close) on the price chart.

And the RSI can also be used for a “breakout” strategy, as well.

So, let’s take a look at some examples.

Charts

In using the RSI as a signal for OB/OS conditions, one practice, which is often taught among traders, is to watch for the RSI to cross into OB/OS territory. Once the RSI moves out of OB/OS territory, we have an opportunity for a possible entry. If done correctly, this method can be profitable – however, it can be a very dangerous means of trading if acted upon too presumptuously. And here’s why.

As we look between the two vertical red lines on the 60-min. Euro chart below, we see that the price moved from a low of 1.5254 to a high of 1.5421 – a rise of 167 pips, while the RSI continued to whipsaw numerous times across the 70-line and back again. Had we entered a short position when the RSI initially crossed above the 70-line, we would have unnecessarily placed ourselves in harms way; likewise, had we taken a position immediately following the subsequent cross below the 70-line (believing the bullish move to be completed), the results would have been equally devastating.

If you are trading Forex (e-minis), a 167 pip correction in the market is not a terrible risk, however, if you are trading Currency Futures (at $12.50/tic/contract), a 167 tic correction could be costly if the market does not follow through.

Taking another look at this same chart (below), we see that the Euro continued to fail in its attempt to reverse for an additional 482 pips, providing a crushing blow to the bears totaling 649 pips before making a defined reversal – now, as a Futures trader, a mistake like that could unnecessarily deplete your trading account immensely.

Right about now you may be thinking, “What are you trying to do, Ty, scare me?” Yes, I am. This is a business – it is not a game. If you want a game, go to the casino. My purpose is to provide you with a healthy respect for the markets. And provide you with the tools needed to succeed in this business. If you disrespect the markets by means of ignorance, laziness, or a basic “nonchalant” attitude, this beast will chew you up, swallow you whole - and not even choke……………...and sleep like a baby when the bell rings.

To combat the fatal error depicted in the previous example there are a number of things that can be done. First and foremost, stay with the trend (which we will discuss later in this lesson). Second, practicing wise money management is a must; making sure your stops are in place. Also, using different settings like 80/20 can also be helpful. Experiment with the different settings and see which ones provide you with the greatest profits (and protection) for the particular time frame that you are trading.

Reversals and Retracements

Remember our definition of divergence; the price rising to a new high, whereas, the RSI makes a new low (bearish). Conversely, when price makes a new low, subsequently, the RSI makes a new high (bullish). Take note; the price trend line and the RSI trend line must be drawn relative to each other as depicted by the two vertical red lines. Remember – compare apples with apples.

In this 4-hr. chart, initially, we take notice of the fact that the price has indeed made a new high, as depicted by the upward sloping trend line (1) while the corresponding RSI trend line (2) is sloping downward indicating that the last RSI reading between the vertical red lines is lower than the initial RSI reading. This tells us that the bulls are weakening. What gives greater credibility to this sell signal is the fact that when the RSI pulled back (to the shaded area), it did not cross above the 70-line – it remained below the 70 level.

So, in summary, in the chart below, the price closed higher than the previous high, whereas, the RSI reversal signal began its formation above the 70 level and divergently moved to a position lower than the previous high.

Once again, let’s look at the same chart where I have added trend lines (TL); two on the price chart and one to the RSI indicator. On the price chart, there is a primary TL and a secondary TL. The primary bullish TL designates the initial trend, however, we see that the price suddenly breaks away from the TL and moves aggressively in the same direction as the trend – providing us with a trend within a trend, designated by the secondary TL (and an opportunity for an early entry). The break to the bearish side of both the secondary TL on the price chart and a break to the bearish side of the RSI indicator provide us with additional confirmation that the bears are taking control.

Trade Example

So, let’s take a look at some various ways we could trade this chart.

First of all, price action is always my first concern and there is nothing that I like better that provides a visual perspective than the Bollinger Bands; so they are always on my charts.
Secondly, I take notice that we have a classic Bollinger Band reversal signal indicating that the bulls may be losing control – so I look for confirmation.
I receive the first confirmation with RSI divergence. Not completely satisfied – I wait for a second confirmation, which is provided to us with the trend line break and subsequent close.
As candle (1) begins to fall, I take notice of the fact that the RSI (having broken the RSI trend line to the bearish side) has pulled back to the shaded area without crossing above the RSI trend line.
As an aggressive trader, I would then place a Sell/Stop order (“sell at the market” if the price action is moving too swiftly) at the low of candle (2). A conservative entry would have been placed at the low of candles (3) or (4).
With a close outside the lower Bollinger Band, I have confidence that the bears are in control so, as candle (5) retraced to the trend line (take note that a candle (5) entry only has credibility because of a price close below the lower band and the RSI has continued to fall below the 50-line) I would then add to my position.
Immediately upon entering the market at any of the levels, my stop/loss would be placed a few pips above candle (1).
With the subsequent BB reversal signal (candle formation 7), I begin to protect my profits with a trailing stop.

Trending Markets

We have just seen how the RSI and trend lines can help take advantage of a reversal or retracement opportunity.

But what about using the RSI in order to stay with the trend longer - “letting our profits run”?

Let’s take a look.

In the 4-hr. chart below, let’s assume we have entered the market at candle (1) with a bullish position on the break of the price trend line along with the break of the RSI trend line with a subsequent cross of the 50-line; we are long.

In the chart below, the Bollinger Bands provides confirmation to the price action as long as the price does not close below the lower band. Each time the market breaks the lower band (without a close) and returns upward, we protect our profits by moving our stops (red horizontal lines) to a position just below the candle that broke outside the band.

Added (or instead of the BB) confirmation is provided by the fact that the RSI (shaded area below) has predominantly remained above the 50-line at each retracement of the price. Each time the RSI moves toward the 50-line and subsequently returns to the 70 level, we move our stops to a position just below the candle that corresponds with the RSI in order to protect our profits – and remain in the market.

In this 4-hr. Euro chart, the close below the lower BB just happened to coincide with the break of the RSI 50-line (Good call).

Trend Trading with Relative Strength Index (RSI) Support and Resistance Levels

Learn the different RSI support and resistance levels to watch for during uptrends and downtrends. Then, use these RSI support and resistance levels to help determine the strength of the current trend. When the RSI breaks these support and resistance levels it often indicates a trend reversal is occurring.

The Relative Strength Index (RSI) is a technical analysis indicator that oscillates between 0 and 100. When the RSI is moving up the price gains are outpacing price losses over the look-back period, and when the RSI is moving down the price losses are outpacing gains over the look-back period. The look-back period is how many many price bars the indicator uses to make its current calculation. The typical setting is 14, meaning the indicator will look at gains and losses over the prior 14 price bars. Traders can use any setting they wish, though. Each new price bar produces a new calculation based on the prior 14 price bars. Thus, the RSI forms a continuous line over time.

When we look at the how the RSI behaves during a trend, we often find that it moves within a defined area for an uptrend and a different defined area for a downtrend. A deviation from this tendency can signal a change in trend. These levels or areas, discussed below, may vary slightly by market or asset.

Trend Trading with RSI

The first thing we need to know is that the RSI moves within support and resistance channels during price trends. The levels the RSI ranges between indicates the strength of the trend and the trend direction.

For daily charts:

In an uptrend, the RSI range should stay above 30, and often hit 70 or higher.
In a downtrend, the RSI will generally stay below 70, and often hit 30 or lower.

This can let us know if a trend is reversing, as a drop below the 30 level on an RSI is rare in an uptrend. If the RSI drops below 30 during an uptrend, or fails to recover above 70, the uptrend could be in trouble.

These levels may vary slightly depending on the market or time frame you’re trading, so look at a historical chart of whatever you are trading to see the RSI levels that are important for the trends in that asset or that time frame (weekly charts, hourly charts, etc.).

In the chart above, 30 acts as a support level for the uptrend, while it was breached for a day or two on a number of occasions the RSI quickly bounced and moved back up to the 70+ level, confirming the uptrend was still in place.

Below is an example of how the RSI acts in a downtrend. Notice how the price is continually reaching below 30 on the RSI (often hitting 20), and doesn’t move above 70. Toward the right side of the chart, the RSI definitively breaks above 70 and reaches near 90. This ended up being a turning point for the stock as the price didn’t reach the April low again. The RSI also helps confirm the ensuing uptrend. The moves up on the RSI often hit 70 or higher and moves down stay above 30.

The next sign of trouble in the stock didn’t occur until years later. In mid-2015 the RSI drops below 30 and doesn’t recover back above 70. A several month downtrend ensues. The RSI then spikes above 70 in April. This marks a potential transition back into an uptrend. The RSI swiftly drops back below 30, though, so we don’t have confirmation that an uptrend has started yet. But, if we look at the price, notice it is barely making lower lows. The downtrend is losing steam, which is why the RSI was able to spike above 70. In August the RSI spikes above 70 again, and then manages to stay above 30 on the oscillations that follow. At this point, the price is also making higher swing highs and higher swing lows. The downtrend is over and the new uptrend is confirmed.

When the RSI moves above 70 and then quickly drops below 30 right after (or vice versa) you can be certain there are likely a lot of traders confused, because the price likely just had a big move up followed by a big move down. Such events often occur at trend transition points (uptrend to downtrend, or downtrend to uptrend) when emotions are high and prone to causing big swings in both directions.

The RSI bouncing between above 70 and below 30 could also signal the start of a big consolidation phase. We see this in the chart below. The RSI helped confirm both the uptrend and downtrend, but then notice how the up moves in the RSI become the same size as the downside RSI waves. The RSI is not showing a bias to toward higher levels or lower levels, it is just ranging…and so is the price. If the RSI is oscillating an equal distance (above and below) 50, chances are the price is in a range, and looking at the price will confirm that.

On the right of the chart above, the most recent move was above 70, and the RSI hasn’t dropped below 30. That favors an uptrend. A drop below 30 on the RSI would point toward a continued ranging environment or a downtrend. Also, whenever a big range or chart pattern develops, watch the price for a breakout or false breakout, as they also provide trading opportunities and analytical insight.

How This Can Actually Help With Your Trading

Trend trading with RSI support and resistance levels can help confirm trends and isolate when the market is shifting direction. That is all well and good, but it is not a crystal ball and doesn’t tell you when to enter and exit trades. For example, you wouldn’t want to trade off RSI support and resistance levels alone, even though just looking at the RSI levels can provide us with a good indication of when the trend is healthy and when it may be reversing.

Using the RSI in this way is only a trend confirmation tool. For example, assume you have a trend trading strategy that just gave you a buy signal. Since you are a trend trader, you want to only be buying if you have a healthy uptrend. Pull up a chart of the asset you are considering a trade in and look at the RSI levels. If the RSI is staying above 30 and routinely reaching above 70, that’s a positive sign for the uptrend. You will likely want to proceed with acting on the buy signal produced by your strategy. If the RSI is dipping below 30 and not reaching 70 that isn’t a strong uptrend. You will probably want to skip acting on that buy signal produced by your strategy.

Also, if an asset is in an uptrend but then the RSI drops below 30, or is in a downtrend and then rallies above 70, that could be the start of a reversal. These are opportunities that may benefit from a reversal strategy. We don’t take trades based on the RSI hitting these levels, but these changes in RSI levels can alert us to potential reversal opportunities. The RSI is letting us know a reversal may be taking shape. The next step is to watch the price action for an entry. To see what to watch for, read Strong Trend Reversal Strategy.

Don’t buy simply because the RSI is above 30 and regularly moving above 70. That just tells us the uptrend is likely in decent shape. We still need a strategy that tells us precisely when to get into trades, and when to get out. The same goes for shorting during a downtrend. These RSI support and resistance levels are just a confirmation tool, and not trade signals.

When the RSI is whipsawing between 70 and 30, or has equal oscillations on either side of 50, the price is likely in a big consolidation/ranging phase. In this case, trend trading strategies may not be as effective. Utilize range trading strategies, or look at the bigger picture and implement a front-running strategy. A front-running strategy takes advantage of the size of the range and the breakout that will inevitably occur down the road.

Final Word on Using RSI Support and Resistance Levels

I rarely use RSI support and resistance levels anymore. Indicators are just interpretations of price data, so often the price itself will tell you all you need to know about which direction to trade in, and when to step aside when the trend is unclear. That said, when I was learning how to read price action,I did find the RSI support and resistance levels useful. I still do refer to them on occasion.

The RSI may help some traders spot trends and reversals—just like they used to help me –and can be used as a confirmation tool. During an uptrend on the daily chart, the RSI of the asset should be staying above 30 and regularly moving above 70. When this is occurring, the uptrend is likely in decent shape and buy signals based on your strategies can be taken.

During a downtrend, the RSI will often move below 30 and stay below 70. When this is occurring, avoid long trades and consider taking short trades based on your strategies.

Watch for deviations to indicate trend changes. The RSI moving above 70 in a downtrend could signal a reversal into an uptrend, for example, especially if the RSI stays above 30 on the next wave down.

I have not found this RSI technique particularly useful for day trading. While it may confirm trends and reversals, intra-day trends don’t often last long enough for the indicator to be of much value.

On weekly charts, this confirmation method can be quite effective. Look at a historical chart of the asset to see which RSI levels are important for marking uptrends and downtrends.

By Cory Mitchell, CMT

Hidden Divergence

Hi, this is Ty Young with Sure-fire Trading.com bringing you another exciting point of conversation.

Isn’t it interesting how we in the “Trading” industry have taken common everyday words of interest and refashioned them to suit our needs? For instance, let’s take the words “trend” and “line”. Grammatically speaking, when we use these two words consecutively, the word “trend” is an adjective that is describing the noun “line”. And as such, they are written as two entities.

However, in our world, “trend line” has evolved becoming an entity in itself, which we use as the compound word “trendline”. An identity that Webster’s Dictionary and Microsoft Word still, to this day, can’t wrap their heads around.

Divergence is such a word…

Google the word “divergence” and you will quickly see what I mean. In our world, divergence has taken on a characteristic all its own. So, sit back and relax as we delve into its nature and how we may use it to identify and confirm higher probability trades.

Among other indicators, our previous lessons have covered topics such as the MACD and the RSI. Let’s broaden our use of these tools by combining them with divergent formations so we may increase our profit margin.

In this lesson do not confuse divergent trendlines with your standard trendlines.

When drawing your standard bullish trendlines, they are drawn connecting the “higher” lows. Subsequently, when drawing your standard bearish trendlines, they are drawn connecting lower highs. Let’s see how this differs from divergence.

Divergence vs. Hidden Divergence

Divergence

As many of you well know, most of my trading is intra-day. Generally speaking, I am a Day Trader. While indicators and trendline breaks are a large part of my trading strategy, divergence can be equally important in calculating strength and weakness of any currency. And though the majority of my trades have been closed within 24 hours of entering the market, I’ve come to realize that divergence, when understood and utilized correctly, can be an awesome asset to trading at the higher time frames, such as, daily, weekly, and monthly charts.

This is because indicators such as the MACD give stronger and more accurate signals when longer-term data is calculated.

In December 1987, February 1991, and October 1992 (below), the Monthly USD/CHF chart formed a series of new lows (A), (B), and (C). If you follow the vertical lines downward, you can see that these valleys on the price chart coincide with new lows on the MACD indicator. However, each of these MACD lows did not reach the same depth of the previous low – in fact, each low was substantially higher (D), (E), and (F).

This is called divergence; and in this case, specifically, bullish divergence.
When using an adjective to describe (standard) divergence, it takes its name from the direction of the indicator not the price chart.
In other words, when the price moves upward, while the indicator moves downward, we call this “bearish” divergence.
Conversely, when the price moves downward, while the indicator moves upward, we call this bullish divergence.
When the price (above) retested the previous lows and subsequently coincided with the MACD rising - divergently, we know that the MACD is expressing a potential for the market to increase in strength.

As can be seen in the subsequent chart below, the contrast between the price chart and the MACD provided forewarning to a tremendous reversal opportunity; which, by the way, was confirmed by trendline breaks (red) on the price chart, on the MACD, and on the RSI.

Below, we have an example of bearish (standard) divergence.

And as can also be seen in the chart below, the contrast between the price chart and the MACD provided forewarning to a tremendous reversal opportunity; which also was confirmed by trendline breaks (red) on the price chart, on the MACD, and on the RSI.

Although the MACD is ideal for determining divergence, divergence can also be found in other indicators as well - such as in this chart of the RSI. Later in this lesson, you will see the Stochastic used to signal a form of divergence as well.

Hidden Divergence

In addressing Hidden Divergence (HD), let’s emphasize something important right now – while divergence signals a potential retracement or reversal in the market, this is contrary to Hidden Divergence in that HD confirms the continued trend. So, if you see what you think is HD but it Does Not take you back into the trend…..

it is not Hidden Divergence.

In other words, bullish HD appears in up-trending markets while bearish HD appears in down-trending markets.

So, without insulting anyone’s intelligence or for fear of overstating the obvious, Hidden Divergence displays itself opposite to that of its counterpart – the Divergence.

So, please follow me here…..

Bullish Divergence (below) is displayed when price reaches lower lows while the coinciding indicator reaches higher lows.

AND

Bearish Divergence is displayed when price reaches higher highs while the coinciding indicator reaches lower highs.

THEN

In contrast, Bullish Hidden Divergence is displayed when price reaches higher lows while the coinciding indicator reaches lower lows.

Remember: The original trend (below) was bullish (red) and so the HD formation signals a potential return to the bullish trend.

When the hidden divergent signal is confirmed with T/L breaks on the price chart and the RSI is followed by a subsequent pullback to the price T/L while the RSI has moved into bullish territory……

We have no fear of entering on the long side of the market.
Entering anywhere within the shaded area (below) would be a high probability trade.

Upon entry, a protective stop (P/S) immediately placed just below the previous low provides us with a safety net with a risk factor of only 30 pips.

And as we can see below, the bullish ride would have been substantial.

LIKEWISE

In a down-trending market, Bearish Hidden Divergence is displayed when price reaches lower highs while the coinciding indicator reaches higher highs.

In the chart below, a retracement of the price coincides with a “distinct” higher high (from one clearly defined peak to the next clearly defined peak) on the Stochastic – indicating a potential for a continued bearish move.

With confirmation (below) being provided by a break of the T/L (red) on the price chart with a subsequent break of the T/L on the RSI coinciding with the RSI remaining in bearish territory….

Once again, we have no fear of re-entering the market on the short side.

With your P/S placed just above the previous high, you can sleep like a baby.

Below is a nice little “cheat” sheet you can copy and cut out and set by your keyboard until you get it set in your mind…..I did…..and it works great.

Divergence Type	Price	Oscillator	Trade
Regular	Higher High	Lower High	SELL
Regular	Lower Low	Higher Low	BUY
Hidden	Higher Low	Lower Low	BUY
Hidden	Lower High	Higher High	SELL

With Sure-fire Trading.com, this is Ty Young, reminding you to “Read the Charts”.

Bollinger Bands

Introduction

Hi, my name is Ty Young with www.surefire-trading.com. And as the newest member of the team, I would like to take a moment to introduce myself.

I am a Technical Analyst. This means, as a trader, it is my position that all action and reaction of the markets – all the fundamentals - are exclusively expressed within the charts. I am NOT saying that there is no place for the fundamentals, I am saying that the fundamentals determine the price – and the price dictates the technical data. So, we allow the price to determine our direction.

It is my goal, here at Sure-fire Trading; to assist you in developing the skills required to become a successful trader.

It is my goal to teach you how to analyze the charts - to teach you how to recognize “High Probability” trades.

As traders, what we do is a blending of chart mechanics and art. I will provide you with the mechanics portion; however, through experience and hard work, you must develop the artistic side of trading. Then and only then will you be able to tame the beasts that haunt every trader – FEAR and GREED.

It is my intention to provide you with the tools that will enable you to trade with CONFIDENCE. So, in the lessons to follow, repeatedly, my emphasis will be - “READ THE CHARTS.” If you hear me say it once, you will hear me say it a million times, “READ THE CHARTS”.

We are not fortunetellers. We are not in the business of predicting the direction of the market. We do, however, interpret the data provided to us by the charts – we then, trade accordingly. When the charts say buy – we go long. When the charts say sell – we short the market. If it’s not saying a thing – we do not trade. PERIOD. So, having said all that, let’s talk a bit about Bollinger Bands.

History

One of my most favorite indicators is the Bollinger Bands. Deriving its name from its founder, John Bollinger takes advantage of price action and volatility to create a picture that helps define the highs and lows of the market. And can even identify reversals within the market.

Like all innovative tools, they find their heritage in the successes and failures of those who have gone before them. John Bollinger, has developed an indicator that has evolved from his knowledge and understanding that he derived from men like Wilfrid LeDoux (the Twin-Line Chart); Chester W. Keltner (Keltner Channel); Richard Donchian (Donchian Channel); Geraldine Weiss (IQT); J.M. Hurst (Timing and Trading Cysles), and the like.

Technical

Bollinger calculated long-term deviation and used it to set percentage bands – in essence an adaptive version of percentage bands (source: Bollinger on BollingerBands by John Bollinger, McGraw-Hill, 2002). Most charting software calculates these bands – but for those of you who have an itch to calculate for yourselves, here’s the formula:

Find the simple moving average:
Having found the SMA, then calculate as follows:

a

Charts

In the chart below, one of the first things that we notice about Bollinger Bands is that the price always moves from one extreme to the other. In other words, once price action has run its course at the lower band, it will eventually make its way to the upper band – and visa versa.

As we analyze a particular chart, we are initially looking for the bands to contract - showing low volatility; subsequently, we are looking for the bands to expand – demonstrating high volatility. We want to trade during times of higher volatility.
Constricted bands are like a person who is canoeing on a slow-moving stream – he has to work so much harder to reach his destination. However, put the same canoe in a fast moving river and a fraction of the effort is emitted - demonstrated by the expansion of the bands.
This is precisely what we are looking for in the Bollinger Bands – this is a “high probability” signal.

False Breakout

In looking for an entry opportunity, always watch for signs of a false breakout – I will guide you within the scope of each lesson regarding false breakouts but you will find, in each case, that experience will be your best teacher.
As the bands begin to widen, we are looking for a close above the upper band or below the lower band.
In the following chart, we have a close below the lower band (1) providing us with a signal for a potential short trade.
However, as the price began to retrace, it closed above the 20 SMA (2) signaling a potential reversal to the bullish side.
As the price began to fall again, we have three consecutive breaks of the lower band with NO subsequent closes of any kind below the lower band (3) – discounting a short trade. We now wait for the market to prove itself, again….patience.

A Conservative Trade

A close outside the upper band, candle (1), signals a potential long entry.
Since candle (1) has closed above the upper band, we immediately place a buy/stop order one pip above the high of candle (1) (if price is moving too fast to accommodate a buy/stop order, then jump in with two feet with a buy at the market).
As candle (2) begins to rise, it easily breaks the previous high by 13 pips - and we have entered the market with a long position at level (3).
Immediately upon entry of the market, our protective stop is placed a few pips below the 20 SMA (4) or (for an aggressive stop) below the low of the candles that broke the lower band after the bands began to widen (5).
Using the same principle, as the price continues in your favor, a trailing stop can safely be placed a few pips below the 20 SMA (6).

An additional Indicator with Trend lines as Confirmation

In this example, I have added the Relative Strength Indicator (RSI) with a setting of 21 and two sloping trend lines (1) and (2) to aide us in providing a higher probability trade and greater confirmation to the Bollinger Bands.
Now, some of you immediately may wonder why I am not using trend line (3) (the red dotted line) as my price trend line – and “cheers” to you for questioning. Remember, the false breakout previously mentioned – it was a failed entry, so we are past this point - so, moving along.
When using a trend line (1) within an indicator relative to a price trend line (2), remember to draw the lines in close relationship to each other. As you can see in this example, the RSI trend line (1) is directly below the price trend line (2) above.
Also, remember to compare apples with apples – when comparing two trend lines (one on a price chart and one within a separate indicator), make sure that the one trend line is drawn relative to the other – DO NOT draw a trend line on the peaks of a price chart in order to compare it to a trend line within an indicator drawn on the dips.

Now, let’s take a look at how to use this to signal a high probability entry.

Once trend line (1) and trend line (2) are broken (that’s “and” not “or”), we have a signal that a possible trade is developing - in this case, at points (4) and (5).
Now, if you look at the trend line break (4) on the RSI, you will see that it correlates with the trend line break (6) on the price chart (the red dotted line that we have discarded) which, as I said previously, we generally do not do; however, because the RSI pulled back at point (7) to trend line (1) without breaking below it, it is still a legitimate break to the bullish side.

Now, here comes the meat…..

Since RSI has not broken below the trend line at point (7), a close of candle (8) above the price trend line (2) provides us with the added confirmation we were waiting for.
Once candle (8) closed, a buy/stop order can immediately be entered one pip above the high of candle (9).
As candle (9) begins to rise, it easily surpasses the previous high of candle (8) by 71 pips - and we have entered the market with a long position at level (10). Pretty cool, huh?
Immediately, our protective stop would be placed below the low of the candle (8) or below the 20 SMA (11) – depending on how aggressive you are in your trading.
As the price continues in your favor, a trailing stop can safely be placed a few pips below the 20 SMA (12).

Adding to Your Position

Knowing that it is best to “let your profits run”, let’s look at the chart below to see how Bollinger Bands can aide in this strategy.

Now, let’s assume that you have already entered a long position at level (1) because of the candle (2) that closed above the trend line (described in the “meaty” section above).
Level (3) or level (4) would be the perfect place to add to your position. And here’s why…..
Because I said so, that’s why…..yes, mother dear. LOL.
Haha, here’s the real reason:
Let’s first look at entry level (3). Of all the candles in cluster area (5) that broke below the 20 SMA, only one closed below the 20 SMA – and insignificantly, at best.
In addition, each of the lows of the candles in area (6) was increasingly higher than the previous candle.
As added confirmation, the RSI reading (8) directly below the candles of area (6) was considerably above the 50-line.
A buy/stop order would easily have been entered one pip above the high of candle (7).
With candle (9) easily moving upward a fantastic 83 pips, we had no problem adding to our long position.
And since candle (9) closed outside the upper Bollinger Band (described above in the section “A Conservative Trade”), we had the perfect entry signal at level (4).
As price moves in your favor, protect your profits with trailing stops as described earlier.

Bollinger Band Reversal Signals

Now, this is where Bollinger really, really shines - and why it’s my most favorite indicator - so follow me closely here. During times of high volatility, price has a tendency to “walk” (and sometimes “run”) up/down the upper/lower bands. A close outside the band with a subsequent break and close inside the band can be a strong reversal signal – or a strong continuation signal. Now, before you walk away thinking, “This guy’s a bubble off plumb” – stay with me a bit longer.

Let’s look at cluster area (1)

We have a close with candle (3) outside the upper Bollinger Band providing a signal to enter long (as described earlier in this lesson).
So, if you’re not long already because of level (4), you will surely be in the market on the long side now, at level (5).
OK, here it is; candle (6), as expected, moves higher than the high of candle (3) – but something interesting happens here. Candle (6) closes inside the upper band – signaling a possible reversal (the operative word being – “POSSIBLE”).
Immediately - I move my trailing stop to a position that is a couple of pips above where I entered long (or may have added to my position) – red line (7), in order to protect my first and second entry.
However, the price fails to reverse, as expected (with no complaints), which would have been indicated by a drop below the 20 SMA – a victory for the bulls. And we remain in a long position.

Cluster area (2)

Once the price again closed outside the upper band within cluster area (2) with candles (8), I am adding (if I’m feeling real brave) to my position and my trailing stop is moved to position (9) – to the low of the second candle within cluster (8). Moving your stops at this point becomes a matter of equity and confidence – and is placed at the trader’s discretion. Don’t get GREEDY!!!
But low-and-behold, look what happens again; the candles (10) have moved higher than candles (8) but have closed inside the upper band – once again signaling a potential reversal.
However, knowing from experience, that often times a close outside the bands with a subsequent close inside the bands can be followed by a final “thrust” (11), I elect not to exit but I immediately move my trailing stop to protect my profits at level (12) – not too close, as to leave opportunity for the thrust upward. I then can decide to exit after the final thrusting action (11) or move my trailing stop to the 20 SMA. In either case, we are out of the market with a tremendous gain – and my Sweetie gets a night out on the town :o)

Now, this is trading. WOWSER!!

Please take note, at this point; I have used the word “possible” in describing the potential reversals. Why is that? It is because, until the price closes outside the opposite band, the reversal is not confirmed.

The price can continue to walk the band virtually indefinitely (or so it seems). And can even close across the 20 SMA and the trend can remain intact. Until the price crosses the opposite band, there is a higher probability that the trend is intact.

Also, the higher the time frame, the greater the credibility. For example, in this Daily chart below, the price walked the upper band for over 1000 pips and had an overall bullish move for over 1600 pips.

So, trader – beware. RSI divergence provided a great signal that this bullish trend possibly was completed – However, we will save that for the next lesson.

With surefire-trading.com, this is Ty Young, reminding you to “Read the Charts” – and have some fun doing it…….

Average Directional Movement Index (ADX)

Hi, this is Ty Young with Surefire-Trading.com and today I will be discussing the Average Directional Movement Index (ADX), which is comprised of the positive Directional Indicator (+DI) and the negative Directional Indicator (-DI).

History

Have you ever heard of the game where everyone sits in a circle and the first person in the circle tells the next person a piece of information? That person then secretly relays that bit of info to the next person…and on and on it goes until the information has passed through everyone in the circle. And when the last person in the circle discloses the sentence he or she received, low-and-behold, generally without exception, the “little one-liner” has been so distorted that the context can hardly be recognized.

And so it is with the study of directional movement.

In studying these indicators, I found a lot of conflicting data being propagated by ill-advised traders – even many of the defining terms had been completely corrupted. As a result, I elected to get my information straight from the “horses mouth”.

In his book, New Concepts In Technical Trading Systems ,

J. Welles Wilder, Jr. states,

“Directional movement is the most fascinating concept I have studied. Defining it is a little like chasing the end of a rainbow….you can see it, you know it’s there, but the closer you get to it the more elusive it becomes. I have probably spent more time studying directional movement than any other concept. Certainly one of my most satisfying achievements was the day I was actually able to reduce this concept to an absolute mathematical equation.”

Wilder is a contemporary technical analyst well noted for his accomplishments as the designer of several technical indicators, including the Relative Strength Index (RSI). Although many traders claim the benefits of using the Directional Movement Indicators as “stand-alone” systems, Wilder developed these indicators to be used as part of a larger system; the ADX and the
+/- DIs were not designed to function as “stand-alone” systems.

In other words, When the ADX signals a trend, a “trend following” system is advised. Conversely, if the ADX is signaling no trend a “non-trending” system is advised.

And frankly, I don’t recommend the use of any indicator without additional confirmation. In this lesson we will be confirming the data received from the ADX with the Bollinger Bands and the RSI.

The implications of being able to rate the directional movement of any index, commodity, stock, or currency is staggering. And due to Wilder’s hard work, we have a product that is nothing short of genius. The process by which Welles developed the necessary equations is complicated and laborious. So, for fear of diminishing the enormity and value of Wilder’s research, I will attempt to interpret his calculations in such a manner as to simplify his intentions so they may be applied and managed practically.

Technical

The calculations for the ADX are incredibly complex the depth of which is beyond the scope of this lesson – giving us a great appreciation for our charting software.

But in order to give you a small taste of what is involved with calculating Directional Movement, below is a custom ADX formula that will plot the decimals after the calculation. The built-in indicators plot exactly as Welles Wilder plots them in his book, New Concepts in Technical Trading Systems. These custom indicators calculate the same way save the rounding aspects that Wilder uses.

Periods:=Input("Time Periods",1,100,14);

PlusDM:=If(H>Ref(H,-1) AND L>=Ref(L,-1), H-Ref(H,-1),If(H >Ref(H,-1) AND L<Ref(L,-1)
AND H-Ref(H,-1)> Ref(L,-1)-L, H-Ref(H,-1),0));

PlusDI:=100*Wilders(PlusDM,Periods)/ATR(Periods);
MinusDM:=If(L<Ref(L,-1) AND H<=Ref(H,-1), Ref(L,-1)-L,If(H>Ref(H,-1) AND L<Ref(L,-1)
AND H-Ref(H,-1)<Ref(L,-1)-L, Ref(L,-1)-L,0));

MinusDI:=100*Wilders(MinusDM,Periods)/ATR(Periods) ;
DIDif:=Abs(PlusDI-MinusDI);
DISum:=PlusDI+MinusDI;
ADXFinal:=100*Wilders(DIDif/DISum,Periods);
ADXFinal

And this is only part of it, so…….

Simply put…

• the DIs and the ADX are displayed on a scale which has a range of 0 – 100.

• When the +DI is above the -DI, a bullish market is implied. As the Dis cross, giving the -DI top billing, bearish control is implied.

• True Directional Movement is the Difference between the +DI14 and the –DI14. “The more directional the movement of an index (or currency), the greater will be the difference between the DIs”; in other words, as seen on a chart, after the DIs cross and their difference increases they begin to “pull away” from each other (the gap widens), while subsequently, the ADX continues to rise – implying a “trending” market.

• In essence, the ADX (Average Directional Index – the operative word being Average) is smoothing the action calculated by the DIs.

THE ADX SHOWS US THE STRENGTH OF A TREND. IT DOES NOT TELL US WHICH DIRECTION THE TREND IS MOVING.

• The +/- Directional Indicator (DIs) shows us which way the trend is moving.

• If the price is criss-crossing in a sideways direction, then the gap would be narrowing – implying a “non-trending” market.

CAUTION

Because, the crossing of the DIs is merely an “early warning”, Wilder states that the following guidelines should be understood….

Did you catch that?

It is only an “early warning” signal.

I found many traders advocating a system that encourages entering the market at the “crossing” of the positive and negative directional indicators –

NOT ADVISED

So, with this in mind……

Top of Form

Bottom of Form

• If the ADX reading is below 20 or the ADX drops below both DIs - a “weak trend” or a “non-trending” market is implied. This does not mean such a signal should not be traded. It does mean, however, that a “non-trending” system should be used for confirmation, i.e., oscillators, such as MACD or Stochastics. But, even though the BBs are not generally defined as oscillators, they are a great tool to utilize for OB/OS levels – (if used properly) “bing-botta-bing

• When the ADX drops below 10, the current trend is virtually dead. Be ready for the beginning of a new trend – bullish or bearish; the ADX doesn’t distinguish the direction. Use your other indicators to make this decision. So, if you’ve been long, and the ADX drops below 10, it’s time to secure your profits. However, after a period of consolidation, a “new” trend may resume in the previous direction.

Don’t assume that since your current position has given you an ADX reading of 10 (or lower) implying that your trend is over that the subsequent ADX move above 20 will take you in the opposite direction….no, no, no.

• An ADX reading above 20 implies the “beginning” of a new trend; whereas; a rise above 25 implies a “trending” market; even a bearish market. So, know this - it is possible to have a reading of 35 and the market can be falling like a rock. An upward moving ADX does not specify market direction – only market trend. Please burn this into your brain.

• IF the ADX rises above the 40 level, the market is even stronger; however…

• If the ADX subsequently drops below the 40 level, it’s an early indication that the market is weakening, which frequently leads to a reversal.

• Subsequently, a turndown at the lower levels (without reaching the 40 line) is generally a retracement or consolidation signal (not a reversal signal)….so, don’t panic. Look for confirmation and trade accordingly.

• After the DIs cross and their difference increases; in other words, as they begin to “pull away” from each other; better yet, the gap widens, while subsequently, the ADX continues to rise – trending market strength is implied.

• Once the ADX breaks above the +DI and the –DI, a retracement or reversal is on the horizon.

However, REMEMBER: Get confirmation!!! I can’t stress this enough - when it comes to trading “with the trend” – especially while trading Currencies, the ADX is often above the DIs for an extended period of time. To interpret a move in which the ADX is above the DIs as an exit signal is generally to exit the market – TOO EARLY.

Let’s take a look at some examples.

Charts

Let’s set up our chart with…

• three guiding levels; 20, 25, and 40 (remember: do a little experimenting to see if the index or currency you are trading has a “break away” level of 25 or not. Your traded market may be lower – like 16 to 25).

Then we add the tools….

the +DI (blue).
the –DI (red).
the ADX (black).

…..each with a setting of 14.

Our “trend-following” system will include the Bollinger Bands, RSI, and your basic trend line strategies (use the systems that suit you the best).

So, we have also entered (chart below)…

• the RSI with a setting of 14 and a guiding line set at 50.

• and our faithful Bollinger Bands set at 20 with a standard deviation of 2.

Now we have a 4-hr. chart of the USD/JPY ready to help us make the big bucks. And what do we see (chart below) - price is in an obvious downtrend, which is confirmed by the following….

the –DI is predominantly above the +Di.
the gap between the DIs have widened.
the ADX breaks above the 20 and 25 levels.
multiple closes below the lower BB - imply bearish strength.
RSI has moved into bearish territory.

A whole lot of confirmation going on…

• If we were fortunate to be riding this bearish train, we would be looking for a good exit point, or….
• If we are not carrying an active trade at this time, we are looking for an opportunity to safely jump into the market mid-stream on the short side - or enter long on a reversal.

So, looking (chart below) at this same chart once again, let’s add some appropriate trend lines. We have a….

primary Trend line (A) on the price chart.
secondary T/L (B) on the price chart.
T/L (C) on the ADX.
T/L (D) on our RSI.

And our interpretation is????

• On the chart above, the ADX has risen above the 40 line and subsequently dropped below the 40 level (A), once more pulls above the 40 level (B), and once again drops below the 40 line (C); likelihood of - reversal….followed by a drop below the 25/20 line (D); high probability reversal.
• The –DI falls below the 25/20 line (shaded area) – the bears appear to be losing control.

Confirmed by….

• A break on the price chart below of the secondary T/L (B) – implying bullish strength
• A suburb pullback to T/L (B) coinciding with …

• A subsequent break of the RSI T/L (C) to the bullish side

Providing us with a great opportunity to enter on the long side of the market – with a minimum target at the Primary T/L (A).

Let’s do another one. Remember our recent Euro crash….check it out.

Below is the EUR/USD Daily chart with the same settings as used previously on the USD/JPY.

+DI is above the –DI (A); bullish

2) ADX is strong as it crosses the 25/40 line to the bullish side (B).

3) Price is on an obvious upward move T/L (C).

4) RSI is strong (D); also bullish.

Now here’s the fun part :o)

On the chart below, the…

• -DI moves above the +DI (A); bearish

• ADX moves way above the 40 line; demonstrating extreme climate (B).

• ADX drops displaying peaks, with each peak subsequently lower than the previous peak,

eventually dropping below the 40 line; reversal signal (C).

On the chart below, our short position “in the making” is confirmed by….

A break of the RSI T/L (A), while the RSI retracement remains below the RSI T/L. (A)
Along with a subsequent drop below the 50 line (B).
RSI rises and falls forming three peaks, with each peak lower than the previous peak (C).
Price breaks and closes below the T/L (D) with a subsequent pullback to the upper BB (E) which is lower than the previous break of the upper BB (F).

All this showing market weakness.

Ultimately – after a bit of consolidation, a short position is confirmed with the use of the ADX and DIs (shaded area), RSI break (A), BBs, and the proper use of price trend line (B)s.

OK, GREAT. Let’s do a trade.

On this 4-hr. GSP/USD below, I will use the ADX as my initial signal to alert me as to the end of the current trend, which presently is bearish. On September 1, 2008, the ADX broke 40 and continued upward (A). It was at this time that I set my trend lines on the price chart and the RSI (B).

Keeping a close eye on these two indicators along with the BBs, I waited for a break of the RSI trend line (C), which occurred three days later. I continued to watch the ADX drop until it fell below the 20 line (D).

When the ADX broke upward above the 25 line (E), I waited for a break and subsequent close of the price trend line (F), which was trigged on Sept. 12th.

Since the +Di crossed above the –DI and the ADX moved above the 25 level (shaded area), and the RSI continued to move upward remaining in bullish territory (G), I dropped down to the 1-hr. chart and entered the market on the long side when the price pulled back to the lower Bollinger Band (shaded area).

Immediately, I placed my Protective Stop (P/S) at the previous low.

Once in the market, I returned to the 4-hr. chart to manage my position.

With a break of the RSI trend line and the price trend line (A), subsequently followed by the DI already meandering in consolidation (shaded area B), I closed my position on Sept. 26th for a gain of over 600 pips.

With Surefire-Trading.com, this is Ty Young, reminding you to “Read the Charts” :o)

Ty Young

surefire-trading.com

Ty Young's Favorite
Forex Day Trading System

The forex day trading system shown below is Ty Young's strategy that he used to win one of the biggest trading competitions in the world.

It's interesting to note that this system uses about a handful of indicators to enter a position. Some people say that indicators don't work as they are lagging behind in time - but Ty proves that using indicators does work.

As seen from the chart below, Ty Young's forex day trading system comprises as follows;

The System

55 & 34 exponential moving averages

Bollinger band ; 20 and standard deviation of 2.

MACD histogram

CCI ; 50 with + & - 100, 200, 300.

Stochastics 8,3,3

How it works

We will consider a position for a long entry. So reverse the rules below for short positions.

The system works on ANY time-frame. Select one that suits your trading personality. ie Short term if you like to scalp the markets and long term if you only want limited participation.

Watch for ALL the triggers to trigger before placing a position. If you are an aggressive trader you can enter the position soon after the trend line break. Otherwise wait until where entry is shown on the chart below.

MACD histogram shows divergence to price action. Notice how price is moving downwards yet the MACD histogram signals divergence. (See how line below is drawn between MACD histogram peaks forming a upward slopping line).
MACD has changed from negative to positive. (MACD is green and above center line).
CCI rises above +100 and stays there.
Price breaks above downward trendline.
Bollinger bands are now moving upwards instead of downwards.
Price touches or comes close to lower bollinger band.
The moving averages start coming closer to one another. Note that they don't have to cross.
Notice rising lower bottoms for price.
Enter long position where shown on chart.

It should also be noted that Ty also trades this system using 55, 13 & 8 EMA's.

The 24 Most Important Rules Of Trading

Always Cut your losses and let your profits run. Take small losses and large wins.
Once you have defined the trend, trade only in that direction.
Always have a game plane. Never enter a trade unless you know where you should get in and where you should get out.
Always use a protective stop to limit your losses.
Be patient. Wait for the right opportunities. Don't just trade for the sake of trading.
If the reason you entered the trade is no longer there, get out.
Do your homework. By the time you enter a trade you should already know what you are going to do and what you expect from the trade. Placing a trade should be the easiest part of trading. If you are still trying to work things out when you enter the trade you are not ready for that trade.
If your method of trading is working, don't change it.
The market is never too high to buy or to low to sell.
Every trader has losses, don't let your losses get to you psychologically.
There is no such thing as an indicator that is a 100% right all the time. Use common sense along with your method of trading. If your indicators are telling you one thing but the market is obviously doing something else, listen to the market.
The market is always right.
Use money management in your trading.
Only trade markets you are sufficiently capitalized for.
Never trade with money you cannot afford to lose.
Be disciplined.
If you hit your target profit, take it. Don't get greedy and hope that you will make more.
Don't try and regain all your losses in one trade.
Don't blindly follow someone else's recommendations. Do your own homework.
If it's not going well, take a break for a few days or weeks. Make sure you are in the right psychological frame of mind before you start trading again.
Don't trade to many markets. It's better to be an expert in one market than a novice in many.
Never meet a margin call. If you have a margin call it means something went wrong with your trade.
By the time everyone knows it's a bull or bear market, it's probably to late.
Loses in trading have no bearing on you as a person.

gemini

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Average Directional Movement Index (ADX)

Ty Young's Favorite
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gemini

Ty Young - full

Dow Theory

Moving Averages

Moving Averages Part 2

Moving Average Convergence/Divergence (MACD)

Relative Strength Index (RSI)

Trend Trading with Relative Strength Index (RSI) Support and Resistance Levels

Hidden Divergence

Bollinger Bands

Average Directional Movement Index (ADX)

Ty Young's FavoriteForex Day Trading System

The 24 Most Important Rules Of Trading

Comments

Post a Comment

Popular posts from this blog

Viet Currency - Phan 20

[VC20] Momentum indicator RSI, ADX

VietCurrency Lesson - Summary version

Ty Young's Favorite
Forex Day Trading System