Trading FOREX Market Action
The easiest way to align price and market action is to use moving averages. Market action is measured by medium-term moving averages. At FX Bootcamp, we use the 21 and 55 EMAs. When the 21/55 crosses, it will show you the direction the market is moving. The angle and separation will show you the strength of the move.
For example, if the 21 crosses below the 55, the market is falling. The distance between the two EMA lines and the steepness of the angle will show how fast it is falling. The greater the speed of the market, judged by the angle and separation of the 21/55, the more confident you should be in developing a trade plan in the same direction. If the market is falling, look for reasons to sell. If the market is rising, look for reasons to buy.
Figure 1 above shows that market is changing. It started the day flat, as indicated by the braiding moving averages. Later on, the currency pair begins to fall, perhaps due to a catalyst such as a news event or economic release. Price crashes and it eventually takes the entire market down with it. Now, with the entire market falling, it’s time to look for opportunities to short.
As you can see, you can adjust your expectations for a trade opportunity by analyzing market action first. If the market is rising and does so quickly, look for opportunities to go long. In this case the market is falling, so create trade plans focused on this trend. How do you know when to short? Pull the trigger when price action begins to fall again.
Trading FOREX Price Action
Price action is in the “moment”… the here and now. The goal is to enter a trade when price and market are aligned. This is called, “Centrifugal Momentum”. Your trade plan is based on entering a trade on the pull backs. If the market is falling, wait for price action or the momentum of price action to the bearish too. I don’t prefer to trade against the market (Centripetal Momentum), as I like to take the path of least resistance.
Price action is measured by short-term moving averages. At FX Bootcamp, we use the 5 EMA and the 8 SMA. When the 5 crosses the 8, it will show you momentum changes in price action. As in speed, strength of momentum can also been seen by angle and separation of the moving average lines.
A trader should start by identifying market changes. Once the market has changed direction with a 21/55 cross, look for 5/8 crosses in the same direction. These opportunities are not guaranteed success, but since price and market forces are both working for you, your odds of success are improved.
An experienced trader can improve their trading by timing their trades using multiple time frames. For spot trading, I suggest using the 15 min and 1 min charts. Try to align the two time frames to refine your entries and exits. Ideally, you can even align both of them with the 1 hour too. If you see a good trade setup on your 15 min chart, let price approach your setup and then drop into your 1 minute chart. Enter or exit your trades based on 5/8 or 21/55 crosses on the short term charts. You may find that your timing is refined.
In Figure 5, you can see the USD/CAD. On the left is a 15 min chart, in the middle a 1 min chart and on the far right, an hourly chart. Note the price shift and the break of the 21 EMA on the hourly chart. Technically speaking, price is falling and market action is slowing down. Now lets try to catch the trade on the lower time frames.
On the 15 min chart, you will see consolidation. This is an opportunity for us. Although it is moving sideways on this time frame, based on the hourly chart, we think it will fall. In fact, if you look closely, the 21 has just crossed below the 55 on the 15 min chart. Technically speaking, the market is falling there too. Let’s look for a short opportunity on the 1 min chart. How does that 21/55 cross look? That would have put you in right about the same time as the 5/8 was setting up on the 15 min chart.
This trade plan has aligned on all three time frames. I took this screen shot in real-time as I wrote this article. I can assure you, it did fall. It was a good trade plan.
Remember, test and practice these trading concepts. Do not trade real money until you have a track record of success using a demo account. Over time, by waiting for market and price to align, you will develop a key trading skill: patience. As you gain more experience timing your trades using leading and lagging indicators, you will develop the discipline to successfully implement your analysis.
These proper trading habits will lead you down the path of success. Enjoy the journey!
Best regards,
Wayne McDonell Commodities Trading Advisor Chief Currency Coach http://www.fxbootcamp.com
Wayne McDonell is the Chief Currency Coach at FxBootcamp.com, a live forex training organization. He is a member of the National Futures Association and registered as a Commodities Trading Advisor. His book “Strategic & Tactical FOREX Trading” (Wiley Publishing) is a best seller in the Foreign Exchange category of Amazon.com.
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