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Liquidity
In general, liquidity refers to how easy it is to sell or purchase assets on the market, primarily due to the increased or decreased presence of market buyers and sellers. So, liquidity zones are areas on the specific price chart with elevated buying or selling activity from the market.
Usually, liquidity is calculated by taking the volume of trades or the volume of pending trades currently on the market. Liquidity is considered “high” when there is a significant level of trading activity and when there is both high supply and demand for an asset, as it is easier to find a buyer or seller.
USDCHF 5 Min Chart – 15.01.2015.
This should make you think and get some perspective when there is an Important Data/News/Central Bank decision
Almost 2.000 pips in 10 minutes, with over 1.400 Pips GAP .
This kind of development will Kill not only your margin, but yours kids college fund, take your home and your panties….
So start thinking and learning NOW.
MACD – How to Trade It
Now when you know what MACD is and how to Set it Up, it’s time to add some spices to it…
If you watched it in Real Time, you most probably got to the point that sometimes it is going to give you a false signal .
Also, setting up the stop loss can be problematic .
To avoid being whipsawed by it, you have to add additional Indicator to it.
Use Moving Average 7 Weighted.
Look at the chart now and you will see that the price tends to come back to that MA every now and then and retest it.
Here is this morning’s EURUSD chart 3 Min.
Watch carefully – only Signals where you have the Rate just below or above ( Sell/Buy) the moving average 7 Weighted ( Yellow line on my chart) is the good one – if the market is running away from you, Do not follow – wait.
Last Bar on this chart – Data reaction – DO NOT TOUCH – not only that the rate is too far away from MA, but it is a data reaction – you really never know how it will end up – stop trading about 10 min prior to data and continue only when you see it returning in the normal mode.
So patiently – do not run to catch the trade – if it is a good one, you’ll have it come to you a bit later – so no need to react immediately when you see MACD cross – you want it at a good price at your own conditions .
You will have to spend some time watching it closely in real time to get a feeling for it and to properly figure out when and how to react.
Mind you – you want to be a trader – no one and nothing will do that job for you – so start doing your homework and forget about so called “trading bots”, “signals” and other baits that you can see all over the net!
I will make traders out of every single one of you, but only if you do it right and follow every single step on that road. There are NO short cuts .
Here is a Recipe for this 3 min chart:
Macd :
26-12-6
Weighted Moving Average :
7
Stop Loss :
1.5 pips ( Important part – if you have a spread with your broker, let me know how big it is , so I can fine tune this stop for you – my spread is 0.0 )
Profit target :
You either fix it on 5 pips +
Or you ride the wave for approximately 15 min
This way, you have R/R over 1:3 and when you hit the right wave even 1:5
Probability of this little system is above 75%, so your chances are really great.
Once you get accustomed to it, I’ll slowly teach you how to re-enter the same wave in cases when they are much longer.
Indicators and how to Trade with them
You have all probably seen different technical indicators in your charting stations, on other people charts and in different articles covering the subject.
Some of you maybe even trade using some ….
Whatever the case is, I am going to cover this field and try to give you the simplest and cleanest view and answers.
And as always I will stay away from explaining math behind it, history, archaeology ….we’ll go strictly with the facts and ways to use them in real trades.
MACD – Moving Average Convergence Divergence
One of pretty useful Technical Indicators is MACD . When properly set up, it does give you a clean view of the waves that are unfolding .
Long cycle : 26
Short cycle : 12
Signal periods : 6
EURUSD 4h
As you can see from the chart above, it follows precisely the waves in which market tends to move.
Actually there is a little difference between this MACD and the moving averages that I use.
The rules are following :
– Entry is represented by Cross Over of the two lines ( red and yellow here )
– MACD does not have limits up or down – so it doesn’t matter the value that you can see on the right side of it
– If used in a combination with Trend lines, it is not that difficult to place your stop or profit target
– You can constantly be in the position – just following it up or down – BUT – that wouldn’t be smart money wise – to be able to profit maximally out of it, you have to pre set Profit target
– To be able to Pre set Stop Loss you need some homework to be done – using past performance , you have to figure out what are the average pull backs from the open ( when lines cross over ) – that way you will prevent bigger losses , but you can count on few Stops in cases when you would be in the profit if your stop wasn’t hit. So you have to use a common sense and some math to come up with strategy that suits you the best
Of course there are some drawbacks with it , like situations when MACD crosses over for just one bar, just to go back in previous direction – not that often, but does happen – so if you enter the position you will lose that one.
Again, you have to do your homework with due diligence and figure out how many times it happens and how many times you will be profitable
That way you will be able to come up with the correct Probability of this little system.
As long as you apply good R/R and Money management ( yes I know, I am obnoxious with it, but until you gonna wake up in the middle of the night thinking first about it, I won’t stop mentioning it) you will be making profit.
Using it in the real time trades, you will get a feeling for it soon enough, and by implementing Trend lines you will never be surprised by its moves.
My Strategy would be to follow the Trend on any given time frame ( do not mix time frames when it comes to using macd ) , and like we had the very nice Channel from 26.06 with clear Up trend, I would be only waiting for Buy Signals. I know it looks on this chart that you could drive it both ways, but it is not always this easy – go back in past as much as you have time to do it and you’ll find situations when Trend Following would save you from lots of trouble
Check it out for yourself , and do tell me : how many times it screwed you …
This is a very simple way to trade and Main secret in this sauce is ( once again J Money Management – if you Risk not more than 2% of your margin, you’ll be well of.
I would like to see some homework done – choose some previous dates ( before this Up channel ) , draw the chart with trend lines , use this MACD and write down the results.
Don’t be lazy – as much you practice and do homework’s, faster you’ll be able to master all aspects of successful trading.
Fibonacci & Trend Lines
I was asked to explain Fibonacci , even in my opinion it should be done a bit later in the game.
But here we are – I am going to show you how you can use it.
I am going to skip on historic part of it, why exactly these numbers and so on – you don’t need that.
What you need is a way to use Fibo lines in a right way and not to confuse yourselves till the moment you don’t know what is up and what is down.
And as always I have prepared few charts to show you how I do it.
On this first chart you can see EURUSD 4h , with my trend lines and Fibo lines
You use the built in Fibo tool in your charting system :
Find the Low from where the whole move started
Click on it and pull it all the way to current high
It is only important that you be as close to real low/high levels
So you are going to get this : Fibo levels painted in Red
So first fibo level that we might reach is 38.20%
Second 50%
Third 61.80
Fourth 100%
As long as rate stays above first two : 38.20 & 50% , it is more than probable we’ll continue in the Up trend
At the third level – 61.80 , chances are 50-50 – below that level probability of dropping below previous low are increasing significantly .
As I sad already, trading is a game of probabilities and lots of math.
Do not EVER go against the probability and avoid 50-50 chances as well.
Now to increase our probabilities some more :
Use the combination of our trend lines and channels and Fibo lines together.
On this second chart you will see that I have added one additional trend line – Green.
It is the parallel line to those lines above – but as you can see, there are no lows and/or highs that it connects.
I have placed it manually, hitting the 50% Fibo line at the end of the screen – a bit of free hand drawing…
Now if you can imagine the following :
As time pass by, and chart continues to move , in about two days time ( this is 4h chart ) that green line will cut through Fibo line 38.20 , and we’ll have Double support there.
Also pay attention to 38.20 – it was a Resistance before .
When using Fibo lines, keep in mind that you have to give few pips up or down – it is not that exact.
Also, it is not the Law – it is yet another tool that helps us to figure out till which level the market will move – probably.
This is the way to try to predict the market moves – not to use it as only way to trade.
Channels Within Channels
To be able to determine the Current Direction of the market, it is enough to draw a trend line, make a parallel to it and you get a channel.
But how to determine how far that trend can go on….how to place stops and profit taking targets?
You have to find Smaller Channels within the big one.
Here I draw a Monthly EURUSD chart.
First I draw that Red line : as that was the first time I had a possibility to connect two dots on chart , using the angle that I have from past.
So as you can see from this chart, I was using Support line to create the possible Resistance later on – and obviously it worked.
As you can see it comes later on as a Support
White line was second – the moment when I had two highs that I could connect with the parallel line ( parallel to the red line)
Much later ( in 2020. ) I added the last one – Yellow line
So we have a Big channel – without previous experience . historical trend lines , having the right angle for the lines, and creating the channel , we would have a real picture much much later – and that is usually the moment when the market start to change the direction…so no good
Next step was to draw Smaller channels within the big one:
First Red line , then Yellow and later on others as time was passing by.
As you can see, there is a Rule – Once the market figured out that we are in the down trend and what are the borders of the channel, Up moves started to create narrower little channels – and they are almost exactly the same.
Now it’s easy to draw it when you have all the levels ( tops and bottoms ) but in reality it is more of a Trial and Error game – you try these lines on every new high/ low until you see the logic of it.
Forex is a game of educated guessing, probability , risk management and strategy.
Once you get accustomed to drawing your charts like this, I am sure your views will widen and you will be able to understand what’s probably coming next.
Be aware that there is no technique that is absolute – there is always margin for error , and your job is to keep it as small as possible.
Process of drawing Historical Trend Lines
First – Original Trend Line was drawn free hand – I connected two significant lows and extended the line indefinitely.
Now I used that very same line , just copied it and start adding it every time the market bounced from a new low.
I didn’t add all those lines on these charts as we need some visibility …but I did it in real time in past.
So when it hit the low in 2000. I added a new one – and it held.
After the first bounce up, I added the third one on the high.
Now the second chart is the same thing, but moved till today.
As you can see, I have added 4th, 5th and 6th Clone.
Have to admit that this 6th trend line kind of surprised me – I didn’t expect it to hold . But so far it did, and as long as it holds, the pressure is Up.
This is a monthly chart and I use it only to have a clear view of general direction.
Once you perfect your trend lines drawings, we’ll move to not only more complicated parts of it, but also to different time frames .
For anyone to get it fully , takes time – so patience and ASK questions freely .
If still not clear, just ask again – and if possible point exactly at what’s not clear, so we’ll discuss it.
Channels
Now when we know how to draw trend lines, let’s go further and create a good playing field.
To get that field, we have to make parallel lines to our original trend line ( with a perfect angle inherited from proven past performance )
Place them as shown in the first picture ( as many good places you find to place them, better)
Extend them further in the future. (pic2)
We made ourselves a Playing Field – Channels that will give you idea where you should enter the position, where to place your stops, where the market is really moving and what can you expect to follow.
So as you can see looking at pictures from 1 to 3 , if you have drawn chart using my approach on 26th June, you would be able to properly follow the market and profit out of it till today, and if you did make some mistakes, using proper Stop Losses you would prevent your account to be wiped out.
Channels are always there ! It is your job to find them and apply them to the chart.
In the future I will show you some prime examples of channels that were working about 35 years ago, and they are still working perfectly ( lots of my trend lines are actually older than most of you 🙂
We didn’t make these roads – we are just maintaining them 😀
Trend Lines
Most of you already know how to draw the trendline : easy –connect two or more points on the chart ( two lows or two highs ) and you have it.
So what can I show you that you don’t already know ?
Well, the way I do it is with the twist, plus there are some untold rules , that no one so far said it out loud.
Look at the first chart – I know, it is a past performance and easy to pick up the trend and tops & bottoms – only two things I want you to pay attention to :
First is the clear rule – once the Support trendline gets broken, becomes a Resistance trendline
Second – every trendline can be penetrated, but to declare it Broken, at least two consecutive bars have to close Below / Above it
So I have found previous trendline – good for me….but how does it help you in your trading ?
Look now at the second Chart:
That Support trend line was there from June 26th – I had it in place the moment they hit that Low.
How ?? Do I have a crystal ball ?
Nope – That is exactly the same Support trendline from the previous chart – I have cloned it ( copied it ) and placed on that low.
I did that each time they left the low behind.
Once you find an appropriate trend line in past, check it out on different occasions – if it fits, you got your Psychic Trend Line – it is always under the same angle, and can help you greatly to predict future moves , or at least give you way more clear view of future events.
– Always under the same angle
– Great warning system
– Gives you the idea where the market actually moves – or can move
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