Weekly Trading Lesson: Common Indicators and Simple Trading Rules

There are a number of simple strategies we can create with the use of two or three common technical indicators. The (1-hour) chart below shows the EURJPY over the course of around 1-week?s trading period. The market initially broke to the downside, as the candlestick activity remained below the 20-SMA (Simple Moving Average) and steadily following the lower Bollinger Band to new lows. Once the market reversed direction back to the upside, trading then emerged above the 20-SMA, following the upper band to recent highs. This brief example provides us with the basis for a few simple trading rules:
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[li]We should make every attempt to trade only in the same direction as the current trend.[/li][li]The trend can be defined by studying the market?s position in regards to the Bollinger Bands and 20-SMA.[/li][li]Protective stops should be placed below the lower band in uptrend?s, and above the upper band in downtrends.[/li][li]Finally, we may initiate a trade at or below the 20-SMA, while taking profits at the upper band; in up trending markets. The opposite holds true in down trending markets.[/ul] This strategy may have to be adjusted depending on the currency pair and market condition, however by analyzing a segment of our charts; we can begin to isolate specific conditions telling us when to trade, and when to simply wait?[/li]