When you’re new to Forex, you should definitely keep your charts simple. That way, as I tell my Forex students, you can’t mess up as easily. Plus, you want to use the simplest, most straightforward charting techniques possible.
So let’s start at the beginning. There’s one “indispensable indicator” you need to learn about first. I like it because it’s dummy proof! Once you set it up, it’s plotted on the chart automatically and most importantly, correctly.
What is it? It’s the Simple Moving Average (SMA), particularly the 50-day Simple Moving Average. It’s just like a simple moving average for stocks. It just tracks the average moving price for the currency pair over the last 50 days.
So why is the 50 Simple Moving Average so important? Because it’s a good medium term trend indicator. It tells you where a currency is headed in the next few weeks. See the GBP/USD hourly chart below and you’ll see what I mean.
Trade in the Direction of the Moving Average and Gain an Edge!
Here’s how you can use the SMA 50: The SMA 50 is a good indicator to know when to either buy or sell a pair. Let’s start with the buy signal. On a British pound chart above, the gray line indicates the SMA 50. As a Forex trader, you want to buy when the trend line (the blue and red line) is above the upward sloping SMA 50 (the grey line), but it’s also nearing the point where it’s touching the SMA 50 line.
On the chart above, you can see that there are three areas where the SMA 50 indicated a potential entry points. I circled them in green.
You can see from the chart above that if you bought when the price was above the upward sloping average but was near the average (green circles), then you had a high probability of picking a winning trade. The SMA 50 indicated three separate entry points because the line provided a “region” of support for the pair.
As I said, you can also use the SMA 50 to know when to short a pair. Start by looking for when the trend line drops below the SMA 50. You also want to see where the SMA 50 slope turns downward. You can initiate your sell order (short) when the pair is close to the average but also below it. I circled these sell points in red on the chart above.
Now, in order to provide extra confirmation and a few more trading opportunities, you can add in my second “indispensible indicator,” the Slow Stochastic (14,3,3 settings). See the chart below.
Combine the Stochastic and Moving Average to get an
Even More Accurate Buy and Sell Signals!
Here’s how to use the Slow Stochastic: First of all, the Slow Stochastic is indicated on the lower half of Forex charts. It’s indicated by the blue and red wavy lines at the bottom of this chart above. You want to catch the trend when it’s either on its way up or down, so you’re always looking for where the Slow Stochastic is changing direction.
As you will notice, the Slow Stochastic follows a similar path to the SMA 50, so you can use both to figure out when your particular currency is about to move in your favor.
A stochastic buy comes when the two lines go down and cross and then turn back upward. A sell signal comes when the two lines rise, cross and then turn back downward. The stochastic gives overbought/oversold indications. But you must ONLY take the entry signal that is with the trend direction and not against it, if you want to have an edge.
Two Indicators = Two Separate Chances to Pick Your Next Winners
The moving average tells you which way the trend is going by pointing the way and by providing its own areas of support/resistance along the way.
Then you can fine-tune your entries by using the Slow Stochastic.
The moving average will ensure you’re calling the trend direction correctly even before you know how to draw trend lines correctly. It will also constantly remind you on the chart to ONLY trade in the direction that it’s pointing. In other words, NO Counter Trend Trades, Ever!
Use this combination of indicators and watch your trading start to improve, almost immediately!
Remember, if the pair isn’t trading fairly close to the moving average, then just move on to another chart where this is the case. Most trading stations will have 20+ pairs to choose from, so you ought to always have something to trade.
