Why choose indicators? A "system" to modify

Beginner Questions
1

Ok, I will do my best to give some insight into my successes ant the tools that got me to where I am. I know this is opening a can of who knows what and it will invariable deepen an apparent rift in trading styles and invite all the perfect traders of the world of Babypips to call me everything but a successful trader. Quite frankly, I’m done with the whole mess.

Now, there are great possibilities to every trading style, and there are pitfalls. The key is to trust in yourself and your ability to know what you are seeing. Forex is not a place to jump into with your fresh live account and hope that, by using a system that worked well for you on your demo account for a month, is going to bring you to undreamed of riches. Every currency pair, at different times, acts in different ways. That is the nature of the game.

The key is in knowing how your selected preferences act at your key trading times. Yes, every trader should take the time to study something on candlestick patterns, but that does not invalidate the use of indicators as they generally confirm or deny what candlestick patterns are telling you. Further, good indicators, and your ability to remember how they act on certain pairs at certain times, can be a crystal ball all by themselves even without candlesticks.

To attain this confidence level in any “system” you will, are, or may want to use takes time. I personally spend upward of 60 hours a week in front of my screens studying and testing indicators and application theories on different pairs at different times to better understand the “nature of the beast”. I have been doing so for almost a year, and still feel I have much to learn. But I also have access to one of my mentors all the time as he too spends an equal amount of time in front of his monitors. He has been doing so for nearly 7 years, and he too is still learning. This is said only that everyone will succeed or fail based on their ability to trust whatever they know about trading, about the pairs they trade and the times of day that are being traded. If you miss a trade, its ok. There will be another one coming. If your style is such that your find yourself “making” trades, you will lose. “Taking” trades that are valid is your true guide.

That being said, let me explain the differences between “making” and “taking” trades. If you have the mindset that you are getting in and out and in and out, but showing losses, you are trying to force a trade that inevitable hasn’t truly set itself up yet. “Taking” trades consists of trusting your knowledge of the pair you are monitoring, the signs, or indicators, or patterns, or whatever, and taking what the pair is giving. Don’t be greedy. And for those of you who say money is the root of all evil, let me use the words in the proper context. “The love of money” is the root of all evil. What is the love of money? GREED!!!

In the next post I will list a set of MA’s I use that are common to every chart I look at and why I use them.

I ask that if anyone should choose to post on this thread, they do so in a non abrasive fashion. Questions are welcome as long as they are sincere. I am not selling anything and don’t plan to in the future on this or any other thread, post, forum or chat on babypips. What I have received freely, I freely share and would expect the same in return.

Live long, love strong, good health and good pippin,

Chubs

2

Sits down and waits :wink:

3

I will be starting using a 5 minute chart, though I encourage all to use a multitude of candle durations (timeframes) on any pair you choose to trade. For the Newbie trader looking to build an account, and I know it may seem a bit slow moving at times, but the safest pair to trade, and usually the pair with the smallest spread is the EUR/USD. Yes, spreads vary from broker to broker and session to session and Market Maker broker to ECN. None the less, start simple.

The first ma is a 13 sma (simple moving average) painted yellow or gold. I refer to this line as the gold or “money” line as price tends to use it at both support and resistance at different times and it gives a wonderful reference to direction. The larger the horizontal gap between this line and standard candlesticks, the stronger the move.

The second ma is a 39 sma painted bright green. If you are not familiar with Elliot Waves, go back to the School of Pipsology. If you are, on smaller time frames like the M5 and M15, from time to time you will notice price breaking through the 13 ma and dancing on the35 and possibly the 3rd ma, but we will get to that in a moment. On an M5, using both these ma’s will give you an idea if the price is a reversal, or merely a temporary pull back. Also, on an M5, the 39 ma gives you a working history of where the 13 ma is on an M15 chart (saves one the hassle of bouncing between charts looking for the next move).

The 3rd and final ma is a 65 ema, weighted, (close for those who have the option), painted black or white, depending on your chart background color. On an M5, this will give you an accurate depiction of where the 13 ma is on an H1 chart and is used for obvious reasons same as the 39 ma.

The reason I use an M15 and watch it is that an M1 will get you trying to catch the next potential move at the very beginning, which is good, but can cause you to doubt yourself should a pair be in a very tight range.

So, when you see a candle starting to show you early signs of a potential reversal, drop to the M5 for confirmation. I use the M1 for entries, and entries only. Once a trade goes profitable, I move back out the the M5. If my profit goes beyond 13 pips without a stall or pull back, I continue out the the m15, check some Fibonacci Retracement numbers, and start looking for signs of the length and strength of the move.

Please understand that I personally have a very low tolerance for draw downs and would rather drop a profitable trade and determine if a move in the other direction is worthy of an entry or just a minor pull back. I look for moves that will go 25 + pips, or I don’t trade the moves. If you see a fresh cross of the 3 ma’s on the M1, you should be good for 4 to 12 pips. If there is a fresh cross of the 3 ma’s in the same direction on both the M1 and M5, you should be looking at 10 to 25 pips. A fresh cross on the M1, M5, and M15, all in the same direction and within 3 minutes of each other, that move is a 25 + pip move on the EUR/USD, and any other pairs I trade.

Now, there will be times when you see a fresh cross on the M1 in one direction and a fresh cross on the M5 or M15 in the opposing direction. At that point, you are looking for an opening on the M1 in the direction of the cross on the M5 and M15.

Also, please keep in mind that counter trend trades are very, very dangerous and it is important to determine the direction of the trend prior to making any trades. It is also advisable not to trade the news. If you know a news event is coming up that will affect the currency pair you are on, wait until the move “takes off” and determine then if it has the go power to support an entry.

There are other indicators and oscillators I use in combination to determine currency index strength, volatility, volume, and a few other factors, but this should paint a rough picture of what charts I view look like in the beginning. Play with them and have fun. This is not a race and you can’t play the game if you take yourself out. Study, Study, Study. Do your homework. Keep a trade log. If you don’t plan your success, how can you expect to succeed?

Next post I will be adding a few indicators with custom values to the picture in hopes of creating a “De Vinci” of depth and magnitude of the charts that are driving my success. In the mean time, good pippin.

Chubs.

4

Ah the MACD. After Bollinger Bands, the MACD was my second indicator and now one of my old standby tools. I have found if you double all the parameters on smaller candle durations (M1, M5, and M15) you will notice a smoothing of movement, if that is what you are looking for.

The MACD is a great confirmation tool to help identify entries and exits based on the histogram direction and fresh crosses of the 2 ma’s . Learn it, Love it, use it, know it.

5

There is a great book you can get on the MACD.

It is "Technical Analysis - Power Tools for Active Investors"
by the inventor himself,
Gerald Appel.

In this book he describes every facet of the MACD like no other book does.

He describes operations that I never see used here, such as the correct MACD settings for entering fast, normal and slow markets.
The same for exits.

I have this book and I can assure you it is excellent.
You will become an excellent MACD trader because this book tells you things that you never otherwise come across.

I commend this book to you all.

6

Thank you for sharing, and would you care to post a link where this book might be available to the rest of us. I am interested and would also like to know if it is available in ebook format?

Thanks,

Chubs

7

Hey Chubs,
I am glad to see that you started a thread on your methods and I will be reading along.

If you are using MT4, it would be wonderful if you could upload all of the non-standard indicators you use, along with your chart template. I enjoy looking at different peoples methods, and find that if I have exactly what they have, it makes life easier to understand what they are referring to…

Of course there is a lot more to trading than the screen, and having your mentor on call is wonderful.

Many more pips to you,
Dale

8

Let me explain why I don’t use MT4. Well, I do and I don’t. I use 3 computers. One, an older pc, only runs MP’s system on MT4, and the other two, both laptops running dual monitors, run VTTrader2.0, Dealbook360, and Marketscope2.0 leaving one screen for chatting and group trading. Most of my custom indicators are on VT2 and MarketScope2.0. I haven’t spent enough time with MT4 to try and create custom indicators, but use the system laid out by what would be my opinion of a good friend and great trader, but opinions obviously vary here.

So, until I have time and energy to spend playing with MT4, I’m just trying to share what I see on Market Maker brokerage charting packages. VTTrader is the Charting package for CMSForex, DealBook360 belongs to GFTForex, and MarketScope 2.0 belongs to FXCMMicro. The indicators I have described so far though, should be universal to all charting packages.

Hope that helps, and I don’t do screen shots. sorry

Good pippin,

Chubs

9

Though the RSI is an amazing indicator of the strength of a move, I have noticed that it doesn’t do much more than confirm direction and momentum. As a tool in conjunction with perhaps a slow stochastics, and with enough time spent learning how it moves on different pairs, it can prove to be a handy tool to add to your tool belt.

The CCI on the other hand identifies over-bought/over-sold conditions. If you view upward momentum candles as buyers and downward momentum candles as sellers, you will notice that, when viewing a CCI, you will much easier be able to discern when a move is “running out of steam” so to speak, and the potential for the “opposing team” to take the offensive.

If you are using a Market Maker’s charting package, you should be able to overlay 2 or more RSI’s or CCI’s in the same window, each using different parameters. Sorry to the MT4 trader, as I have no idea if this tool is available to you. The point is here, lets say you overlay a 14 CCI and a 34 CCI in the same window. Depending on market conditions, and only as a confirmation indicator, you can see when the two seem to be moving in the same direction, one ontop of the other, those will be your smoothest moves. Also, at a cross of the two, under overbought/oversold conditions, this could be a great confirmation of a pullback/reversal.

As you can probably see, I am a bit more partial to the CCI, but both it and the RSI have their advantages and disadvantages in different market conditions.

Go forth and learn your tools. Study, Study, Study. Do your homework. I will probably say this more than a few times, but knowing when to exit a trade is of equal or greater value than entries. So, learn your tools, create a strategy that suits your trading style, and don’t over trade your account.

Good Pippin,

Chubs

P.S. Did I mention to study and do your homework???

10

Sorry for the delay in reply - I was dealing with other matters on the forum.

I will post the website that is on the book - it is the only link that I can find.

I purchased the book from a quality finance and trading bookshop.
The book is printed by Financial Times Prentice Hall, March 2005.

Library of Congress number…2004116766.

The website…TechnicalAnalysisByGeraldAppel.com (put the www. in front of it)

The book has 10 chapters with chapter 8 being devoted entirely to the derivation and correct use of the MACD.

I have learnt a lot from this book.

11

Do you mean the 39 ma? :o

12

Yes Concept, I did mean the 39 sma. Thankyou for pointing that out.

Tymen, Thankyou for the reference to the book. I encourage anyone who wants to learn more about the MACD to investigate threads, posts, books and ebooks on the subject. I personally play with indicators to find the best parameters (easiest for me to read) on pairs and time-of-day that I will be trading. I believe as long as you write down your original (default) settings, then play with them to dial yourself in after you know how they work and how to read them, you will find trading more interesting and practical. Don’t just throw an indicator on a chart and watch it for a week and think it is the holy oh my goodness.

That is what I was referring to in the title of this thread. Everyone sees things differently. My indicators and settings may not work for everyone, but I see my picture very clearly. And that is what trading should be. Easy. I am no rocket scientist, but I love to trade. Just sitting in front of my charts is a security blanket all by itself.

So, in closing, don’t be afraid to alter other people’s settings, but know first why those settings are being used, especially if they are the default settings of the indicator. Also, don’t be afraid to ask questions. When the source of information is available, the only foolish question is the one that goes unasked.

Good pippin,

Chubs