When trading we look to short in supply zones during downtrends and go long in demand zones during uptrends. Easy enough, right?
Theoretically, yes, but the main question is “Which time frame are you using to determine direction?” This week’s lesson is specifically applied to you day-traders out there.
First off, let’s define a day-trader who, for example in the stock market, is someone who enters and exits the trade in the same trading day, buying 1,000 shares of XYZ in the morning and selling those 1,000 shares in the afternoon.
In the spot forex market, the trading day isn’t as clearly defined. For this lesson, we will assume you are looking to be in a trade for a few minutes to a few hours and trading from a 15-minute chart.
Next we have to define what a moving average is and why we would use it. Investopedia defines a moving average as “an indicator frequently used in technical analysis showing the average value of a security’s price over a set period. Moving averages are generally used to measure momentum and define areas of possible support and resistance.”
Most of you have probably used a moving average or two in your trading career; they have been around forever. In my own trading plan, I have a few strategies/techniques that I use to enter and exit trades, as I’m sure you do as well. I am personally using several moving averages from the daily and weekly charts on my currency pairs and applying those figures to my 15-minute intra-day chart for a short-term (almost scalping) trade style.
Why? Because major money movers like hedge funds, multinational corporations and banks (the institutions we talk about so often) are using them for direction and entry. If price pulls back to a moving average, many big-money players will use that retracement to re-engage in a longer-term trend.
I, however, am a shorter-term player. Knowing that these institutions will be scaling into a trade as price is hanging around a moving average gives me a chance to join them for at least a few little pips to add to my account.
So which moving averages should you use? Well, the possibilities are endless, but here is what I personally use: 50-, 100-, and 200-period simple moving averages and 50-, 100-, and 200-period exponential moving averages from both the daily and weekly charts. Yes, there are six wiggly lines on both charts, for a total of twelve possible levels to mark!
Notice how price action seemed to respect or bounce off the particular moving averages over time. This shows the power of the institutions and their use of the wiggly lines. If only we could harness the power of those darn institutions for our day-trading. Well, here is how you can do that.
I mark the location of these daily and weekly moving averages on my 15-minute chart and use the intersection of pure supply and demand zones with them to short-term trade intra-day.
Notice how the 15-minute chart came right down to the 200-day moving average marked in pink and bounced off of that level? Of course, it was an intersection of a previous supply/demand zone, but this odds enhancer certainly helped me choose the correct demand zone to go long in. You can see on the daily chart that we hit the 200-day simple moving average just a few hours later, so this was a nice move.
Now look to the next day and the shooting star candle. Wonder why it chose to stop right there? Take a look at the weekly chart above. That would be the 50-week exponential moving average stopping our GBP/USD pair dead in its tracks.
Looking to the left, there isn’t a clear supply zone that would indicate that this pair would stop at the 1.5990 level on either the daily or weekly chart, but that moving average stopped the price from going any higher.
Mark a few of these moving averages on your intra-day charts and look for clean supply and demand zone intersections for your intra-day trades.
Rick Wright can be contacted on this link: Rick Wright