PipSqueaks #20 Part 2: Be Your Own Indicator (or Filter)

In part one we looked at an example trade where an entry decision was helped by the use of a second indicator. Let’s take a look at another example trade:

own indicator forex nadex


In this AUD/JPY one hour chart we’re again looking at a moving average cross over strategy, with a 13 EMA (red) and a 20 EMA (blue). On the upper left we have a sell signal with the blue arrow indicating price action when the signal was generated. The red and green dots are from the “Non-lag Dot” indicator. When the signal was issued, we had the following conditions: 13 EMA crosses below 20 EMA (bearish), price action below the EMA’s (bearish), the Non-lag Dot is red (bearish), price is below the non-lag Dot (bearish), and the EMA’s are sloping down (bearish), so of course, we jump right in and bam! Price continue down 9 pips, then moved up over 20 pips to -12 pips! In part one I mentioned the first rule of trading (money management is everything). The second rule of trading is PRICE CAN AND WILL DO WHATEVER IT WANTS regardless of what the indicators tell you or whatever you think price action should do. Okay, so after a 12 Pip pull back price action eventually moved down 38 pips from the high of the green entry candle, giving an opportunity to grab +10 pips or perhaps a few more. The point is in this example is having the non-lag Dot indicator added to the chart reinforced a trade entry indicated by the EMA crossover, as well as having confidence in placing the trade and staying in it.


Let’s take a look at the Buy signal on this chart. The black arrow shows price action when the buy signal (green arrow) was generated. At that time the non-lag Dot is green (bullish), price is above the non-lag Dot (bullish), 13 EMA crosses above the 20 EMA (bullish), EMA’s are sloping upwards (bullish), and price action is above the EMA’s (bullish). And what happened? Price drops about four pips from the candle open and then shot up +19 pips, moving up to +29 pips five hours later. Not too shabby!


Of course, the confluence of multiple indicators is just one example of filtering. One prime example of filtering which should never be omitted from a trade consideration is the effect of news. Is your trade signal just minutes away from a big news event? That should suggest to hold off and wait out the news. Is the market in an overall up trend or downtrend? The bigger picture is another important filtering consideration placing a trade. Trading with the trend has a greater probability for a stronger, longer move than trading against it. Relative strength of currencies traded is another good filter. If the USD is strong and the CAD is weak, then a long position on USD/CAD is more desirable than a short position. Risk to reward ratio be another form of filtering, whereas a trade with a low risk to reward ratio is more desirable than one with a high risk to reward ratio. Another strong filter is looking at the overall trend. Using a 200 simple moving average, when price action is above the 200 SMA, take only long positions. Conversely, they only short positions when price action is below the 200 SMA.


Another filter is time (as in time of day). Try to avoid entering trades during times of unpredictable volatility, or when spreads are large, such as the near the end of the New York session (volatility) and the hour immediately thereafter (spreads typically are at their largest). Of course, something you shouldn’t avoid (and really does not need a filter), is becoming a Sapphire member in Slick Trade. One of the benefits of membership is access to tools such as the crossover signal indicator (Follow the Trend) that I used in today’s example trades. Additionally, there are Expert Advisors, training videos, assistance of other traders and more besides! So why not sign up and become a Sapphire member today? You’ll be glad you did!


That’s all for this week; in the next issue going to revisit the Ice Cream Sandwich trade along with some thoughts on GBP/USD. Have a great week trading and, as always, thanks for reading!   JC


Miss out on last week’s Pipsqueaks Article?  CLICK HERE to access!

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