SOME WORDS ABOUT THE TREND

I believe that everybody heard such a saying as “the trend is my friend”. Many of us also had met in Internet and books different opinions as to the sence of this saying.

Well, what is the real meaning of it afterall?

The real meaning and idea of the saying is a simple and clear demand: Trade in the direction of the trend and ignore trading signals directed against the current trend.

Friendly trend would remain friendly, while trader treats him like a friend , not doing something against the desire and will of the his friend/trend. Do you know friends who would not be disturbed by your doings against their desire, understanding and will ? Nobody likes such things.

But nevertheless, many of us starting examining charts absolutely forget this simple and clear rule and start trying to catch the high or low peaks or to trade against the trend. This means, that the trader lacks main thing - dicipline. It is interesting, that the looser, while considering and investigating his own mistakes, often even does not see his main mistake - trading against the trend.

How the trend could be defined ? Very simple - with the help of combination of four Simple Moving Averages (MA). For example, let us take combination of 5/20/40/60 ??.

Usually current trend is defined by looking at Daily chart and this is right. But the traders with small cash amounts may define trend at 4-hour chart and 1-hour chart. It often happens that in the interests of relatively quick trading the trend may be defined using only 1-hour chart. But we should not forget about the Daily chart, because if the hourly signal coincides with the daily trend, then there appears a brilliant possibility for a mighty movement along the trend.

But let us return to the above mentioned combination of MAs. So, if ?? 40 is above ??60, then the trend is upward and each time when MA5 crosses MA20 upward (that is in compliance with the trend direction), we enter the market. But when MA5 crosses MA20 downward, we use this signal only for closing of previously opened positions.

And vice versa, if ??40 is under ??60, then the trend is downward and now we enter the market only when MA5 crosses MA20 downward, and we use upward crosses of MA5 and MA20 only for closing opened earlier positions.

The red dots at the above chart denote the crosses of MA40 and MA60. Blue and red lines show the places for openeing positions in the trend direction.

I know traders, who, in the situation alike trying to catch the price peak, opened SELL positions near the blue lines. If the trader opens positions without minimum analysis at least for definition of the current trend, then he would better go to casino, where one can always trying to guess right, but never can make a prognosis. There exists an opinion that MAs are lagging behind as an indicator. It’s true, sometimes, but as a trend indicator, they are very good.

Here ??5 - green, ??20 – red. Red dot - place of closing position ( MA5 crosses MA20 downward). Blue dot - place of opening position in the trend direction (MA5 crosses MA20 upwards ).

We have the same at this chart - red dots - places of closing positions, blue dot - place of opening position in the direction of the current trend.

But WHERE should we place a stop-loss ?

If we enter the market just after the cross of M40 and MA60, then the best place for stop would be 2-4 pips (points) beyond the closest peak directed opposite to our market entrance direction. If you agree, of course, with the size of the stop-loss, or if your collateral permits such stop. But if we opened position some time after MA40 and MA60 had been crossed, then the best place would be 2-4 pips beyond MA60, then, a bit worse, but still ok, beyond MA40 and the weakest variant is beyond MA20.

It’s only natural that the combinations of meanings for MAs could be whatever the trader would like, cause nobody can prevent him for experiments. Here are some examples of four simple MA combinations : 10/20/60/80 or 8/12/24/48 or you may even use Fibonacci numbers like 8/13/34/55 or 13/21/55/89 etc.

The main idea in the combination of four MA is that the pair with big numbers defines the existence of the current trend and the pair with small numbers permits us to effect relatively quick trades.

Here is one more example of trading with the trend. Upward cross of MA40/60 is designated by two blue dots. Red dots are denoting the places of positions closing after MA5/20 were crossed downward. One blue dot shows the place where the position in the direction of the current trend was opened again after MA5/20 had crossed upwards.

The next chart is the same as above, but with the aim of comparison it has another combination of four Simple Moving Averages - MA8/13/34/55.

I understand perfectly that all stated above is not something new. But looking at beginners I noted that disregarding the current trend is one of the most often met mistake, which lead to losses. Therefore, the aim of the above material is to remind once again about the necessity for checking the trend direction before entering the market.

Good luck !

© Nikolajs Serikovs, April 30, 2003

PRACTICAL COURSE FOR BEGINNERS (2)

THE FRACTALS AND ONE SIMPLE MOVING AVERAGE

THE FRACTAL

Fractal… what is it? For our trading purposes and in accordance with Bill Williams, we’ll remember that the fractal on the chart is a structure built of bars or candles. Fractal’s structure consists of 5(five) bars, where there must be a central bar and two bars on his left and two bars on his right side.

if we place here candles instead of the bars, nothing would be changed, in the sence of fractal’s structure.

The fractal directed upside must have a central bar and two bars on his left and on his right with their highs lower than the high of the central bar. Those bars minimums are not important. Relations betweem highs of the 2 bars placed on the left and 2 bars on the right from the central bar are not important. It is important that highs of all left and right bars be lower at least for one pip(point) than the high of the central bar.

The fractal directed downside must have a central bar and two bars on his left and on his right with their lows higher than the low of the central bar. Those bars highs are not important. Relations betweem lows of the 2 bars placed on the left and 2 bars on the right from the central bar are not important.
It is important that lows of all left and right bars be higher at least for one pip(point) than the low of the central bar.
The price level of the fractal’s central bar is always an important level of support or resistance for the price movements.

FRACTAL’S FORMS (central bars are in red)

Two or three central bars and sometimes more (here marked in red) always must have the same price level and they are playing the role of ONE central bar.
If we have between 2, 3 or more central bars with one price level, another bars not penetrating the price level of the central bars, then we simply don’t count them at all(as in the fractal on the right in the second row).
The main thing is that we must have in any fractal structure 2 bars on the left and 2 bars on the right from the central bar, and their lows must be higher than the central one or their highs be lower than the central high.

The fractals are present at any time scale (5 min, … 2 hours,…. day, etc.,).

Fractals are like flags installed at places were all the market participants decided not to move further. But when the fractal is broken, it is a signal that the market participants decided to move beyond the “border” created by fractal.

IMPORTANT NOTICE !!! The fractal is considered born or formed(and therefore the price level of the fractal becomes ‘legal’ for any calculations), only when the second bar on the right from the central had been closed and the next bar was opened.

This is a very important rule, because in this manner the market itself shows important levels inside it.

One should study the types of fractals’ structures very goood so as to determine them on the charts automatically himself. Today there are programs where the fractals are shown on the charts, but it is always better to know for yourself.

Here is an example of MetaTrader 4 chart with fractals marked by red ticks(grey by default):

MOVING AVERAGES(MA)

There exist several types of this indicator, namely : simple, exponential, weighted and shifted Moving Averages.
In the prominent book “Technical Analysis of the Futures Markets”, written by John Murphy there is a story about the Merril Lynch research group, studying the Moving Averages. In the result of their research they came to a conclusion that among all types of Moving Averages – the Simple Moving Average(SMA) is the most effective and in the best way reflects the price dynamics. That is why we shall speak here only about Simple Moving Averages.

We shall use the one hour time scale as a basis and work mostly with hourly charts. In no case should this prevent anybody from using the charts in any other time scale. We shall use the ??16. Of course any trader may expirement with other meanings for his Mas.

Now let us us see how can we use both, that is the fractals and Simple Moving Average(SMA or MA) to trade the markets. The general principle is very simple. When MA16 moves downward, all the fractals(upside and downside fractals) must be UNDER MA16 and when MA16 moves upward all the fractals(upside and downside fractals) must be ABOVE MA16. Of course, some bars or even fractals would penetrate MA 16 in both directions, but the above stated is the main idea, and about penetrations we shall speak in the section concerning stoplosses and methods of closing the previously opened position.

At this chart we may see, that MA16 is directed downward and fractals are UNDER MA16.

At this chart we may see, that MA16 is directed upward and fractals are ABOVE MA16.

We all know that the price goes up and down and therefore we should find the place where the given trend(direction of price movement) will be changed or broken.
How should we do it ?
It is also very simple. In accordance with Bill Williams, we should wait or look for at least one(though two are much better) fractal(s) opposite for the current trend with its(their) central bar(s) protruding beyound MA16.
That means that if MA16 is directed downward the highs of the central bars of these fractals should be ABOVE MA16 and if MA16 is directed upward the lows of the central bars of these fractals should be UNDER MA16.
When such bar(or two bars) is(are) broken it is a signal for us to enter the market.

Red dot here marks the opposite to previous trend(upward trend) fractal with the central bar protruding beyond Ma16. When this fractal was broken(that is when the price and better bar or candle “close” goes lower than the low of this fractal central bar) we enter the market selling euro/usd.Even the beginner will clearly see that such signal for entry is absolutely fine for closing the previously opened position. In this case it was a “buy” position.

The same but symmetrical situation is here. The red dot again marks the opposite to previous trend(downward trend) fractal with the central bar protruding beyond Ma16. When this fractal was broken(that is when the price and better bar or candle “close” goes higher than the high of this fractal central bar) we enter the market buying euro/usd.Even the beginner will clearly see that such signal for entry is absolutely fine for closing the previously opened position. In this case it was a “sell” position.

When we have 2(two) fractals opposite for the current trend with their central bars protruding beyound MA16, then we enter the market only after break of the second fractal.
What is the “second fractal”?
Both fractals in the pair may be of the same level(level is the price level of the fractal’s central bar) and then we enter the market after break of this level. But more often two fractals in the pair have different levels. One of them would be higher than another when we are awaiting the upward break of the current trend and this will be the “second fractal”. One of them would be lower than another when we are awaiting the downward break of the current trend and this will be also the “second fractal”. We receive the best signal for a trend break when the second fractal is on the left in the pair and it is broken by the price. The break of the combination where the second fractal is on the right in the pair quite rare gives a good move and more often signals that the reverse may soon happen.

Here we have an example with a pair of opposite to the current trend fractals beyond the MA16 with the same price level of the fractal’s central bars. Break of this level produced a signal for opening a ‘sell’ position of the gbp/usd.

On this chart we may see the same situation only with another direction of the break.

The “second fractal” in the given pair is on the left and its break gave us a signal for buying the usd/chf. Break of this fractal combination gave a move for almost 100 pips.

The “second fractal” in the given pair is on the left and its break gave us a signal for selling the gbp/jpy. Break of this fractal combination gave a move for approximately 200-240 pips.

The “second fractal” in the given pair is on the right and its break gave us a signal for selling the gbp/usd. But soon the reverse occurred.

In the left down corner of the chart we may see a pair of fractals directed downward and marked with red dots. In this pair the “second fractal” is on the right and after it was broken the reversal to the north had happened. The first from the left to right pair of fractals directed upward and marked also with red dots, has the “second fractal” on the right. After the “second fractal” was broken, the market had reversed soon.Here we have one more pair of fractals denoted with a red and green dots. The “second fractal”(green dot) in this pair is on the right. When it was broken, the reverse did not take much time to happen.Just on the same chart we have another pair of fractals denoted with blue dots, where the “second fractal” stands on the left and that means that this pair of fractals is the best combination for producing the signal for entering the market. After the “second fractal” was broken we got a signal for buying the gbp/usd and the price moved up approximately for 100-110 pips.

Now about stops. Where should we place them ?

Placing of a stop-loss order. We place a stop-loss order 2 – 4 pips beyond the peak of the nearest maximum opposite to open position fractal.
Still the common practice demands to place a stoploss beyond the second to the left opposite fractal. Only when the second to the left fractal is absent, we simply choose the nearest maximum opposite to our opened position fractal or simply any bar.

Signals to leave the market or to close previously opened position.

1/ The close of a countertrend bar appears at least for 1 point beyond simple MA16.
2/ Break of the countertrend fractal happens beyound simple MA16.
3/ Drawing a trendline using the fractals(if the fractals are absent, one must use the most prominent bars) and leaving the market on the first break of the drawn trendline by the price.

Meanings of digits on this chart:

1 – sell on downward fractal break
2 – close of sell on break of trendline
3 – close of sell when opposite to trend bar ‘close’ appears beyond simple MA16.
4 – buy on upward fractal break
5 – stop-loss placing 2-4 pips under the fractal.
6 – close of buy when opposite to trend bar ‘close’ appears beyond simple MA16.
7 – buy on upward fractal break
8 - stop-loss placing 2-4 pips under the fractal
9 – buy on upward fractal break with stop-loss at 8.

It is well-known that the market sometimes happens to be in the range, when it seems nothing is clear, but such cases are very important, as the longer is the time period for the range, the bigger will be the movement after the break of the range. First, what the trader must remember, is that only break of range extreme bars/fractals becomes a signal for sell or buy. Breaks of fractals inside the range are not signals.

On the next chart we see the range marked by two slate blue lines. Red dots denote the up and down extreme fractals. The range itself was formed during 17-Jan-08 and was broken(green dot) only on 21-Jan-08 and gave a nice move for approximately 150 – 160 pips. The most difficult here was the process of waiting. Not every trader can withstand this ‘waiting’. It is one more example of needed strict discipline for the trader.
In addition to that, we may add, that during the range MA16 was almost horizontal and when the break of the range happened, MA16 was already clearly directed downward.

Attention and discipline – two factors which would bring you a success.
Hey, isn’t it the same in any business ? Looks like it.

Good luck friends!

© Nikolajs Serikovs, February 01, 2008