Monday, December 25, 2006

Forex 1-2-3 Method

This particular technique has been around for a long time and I first saw it used in the futures market. Since then I have seen traders using it on just about every market and when applied well, can give amazingly accurate entry levels.

Lets first start with the basic concept. During the course of any trend, either up or down, the market will form little peaks and valleys. see the chart below:

The problem is, how do you know when to enter the market and where do you get out. This is where the 1-2-3 method comes in. First let's look at a typical 1-2-3 set up:

Nice and simple, but it still doesn't tell us if we should take the trade. For this we add an indictor. You could use just about any indictor with this method but my preferred indictor is MACD with the standard settings of 12,26,9. With the indictor added, it now looks like this:

Now here is where it gets interesting. The rules for the trade are as follows:


1. This works best as a reversal pattern so identify a previous downtrend
2. Wait for the MACD to signal a buy and for the 1-2-3 set up to be in place.
3. As the market pulls back to point 3, the MACD should remain in buy mode or just slightly dip into sell.
4. Place a buy entry order 1 pip above point 2
5. Place a stop loss order 1 pip below point 3
6. Measure the distance between point 2 and 3 and project that forward for your exit.
7. Point 2, should not be lower than point 1

The reverse is true for short trades. As the market progresses you can trail your stop to 1 pip below the most recent low (Valley in an uptrend). You can also use a break in a trend line as an exit.

Some examples:

There are a lot of variations on the 1-2-3 setup but the basic concept is always the same. Try experimenting with it on your favorite time frame.

Written by Surefire Forex Trading

Friday, December 15, 2006

A Different Type of Moving Average Cross

Virtually every trader has dabbled with or experimented with some sort of moving average. What I want to introduce you to in this lesson is a different sort of moving average cross method, which I have found to be very good at identifying short term trend changes.

As we know a moving average is normally plotted using the close of a bar e.g. if you were plotting a 3 period moving average, then you would add the last three closes and divide the total by three to get a simple moving average.

This is where I want you to think a little differently. I have always been an advocate of taking traditional thinking and changing it around. What if you used the open instead of the close? What if you used the close of one period of a moving average and the open of another?

First, most charting packages will allow you to use the open, high, low or close to plot a moving average.

In the example below of the daily Dow Jones, I have used a 5 period exponential moving average of the close and a 6 period exponential moving average of the open. As you can see it catches the short term trend changes really nicely.

In the next example of the 1 hour EUR/USD, you can see that the close/open combination worked really well. Of course you will go through periods of consolidation with any market and any moving average method you use will be whipsawed. To get around this you need some sort of filter or approach that helps you keep out of the low probability trades.

You could use ADX, Stochastic or MACD to help filter the noise but I also like to add a time frame.

In the next example of the 4 hour GBP/USD you can see that on the 24th September 04 at 4:00 there was a cross of the 5 period exponential moving average of the close above the 6 period exponential moving average of the open. This signal has remained in place until today as I write on the 27th September.

Although there was a signal on the 4 hour, to help identify even better entry points you can drop down a few time frames to the 30 minute chart. As you can see from the 30 minute chart there have been quite a few crosses of the 5 period exponential moving of the close above or below the 6 period exponential moving average of the open.

There are lots of ways to trade this but a neat little trick is to wait for the signal on a higher time frame and then drop down a few time frames and wait for a pullback. The first signal after the pullback on the lower time frame is normally a pretty good entry point e.g. If there were a cross up on the large time frame then drop down to a lower time frame and wait for the market to retrace and then give another buy signal (cross up). The opposite is true for short signals.

Once you get the signal on the shorter time frame depending on where support is you can usually place your first stop loss under the nearest support area (valley). If the market begins to make progress you can move your stop so that it trails the market by moving your stop to just under the most recent support area.

In this lesson I have use an exponential moving average but experiment with different types of average such as weighted, smoothed or simple. You can also experiment with different lengths of moving average.