Before the Forex markets opened up today, I did a quick (and incomplete) run-through of more indicators than just the MACD. Included was also the ADX (Average Directional Index) and the ATR (Average True Range) and they were sort of covered a little quickly and with some wave stuff in there, too. Here’s the video (it’s about 9 minutes 29 seconds)…

So some quick stuff that was gone over in the video, however incomplete it is in the vid…

I’m changing gears here on this training. The Forex Challenge on Facebook, which ends October 31, 2008 for this match, and me being challenged, and starting off over $85K behind the leader, calls for a time efficiency step. Hence, this change.

What I’ll be doing is going over charts at least 3X per week for you. Maybe not in the same currency pair, but with the same indicators: MACD, ADX and ATR.

The MACD is there for spotting divergence patterns. The ADX is another strength/weakness tool, though not used like the MACD because it’s not an oscillating indicator. The ATR, which I’ll have to cover separately down the line, is not used at all in reading the charts, but for trade sizing.

The odd thing is here I won’t be using much trade sizing until I overtake the leader, assuming that I can.

ADX Basics

The Average Directional Index, ADX, shows strength in a move or trend, or weakness in the move or trend. When the market makes a move and the ADX decreases, that’s a weak move in that market on that chart.

When the market makes a move and ADX increases, that’s a strong move in that market on that chart. It’s a sign of strength on that chart only, and is basically useless unless accompanied by other signals.

It gets better later down the line, but really start understanding that little bit now. Ask your questions and I’ll answer those questions, or respond to comments, as I can.

ATR Basics

The Average True Range, or ATR, is only used by me to determine trade size. In other words, I divide my account, under actual trading circumstances with real money, into “units”. The “unit” represents, say, 1% of my trading account.

In the EUR/USD or the GBP/USD one pip is $10, so that makes it pretty easy. The ATR acts as a “volatility normalization” tool. The more volatile a market is, or the bigger the chart is, the higher the ATR will be. The smaller the volatility in the market, or the smaller the chart, the lower will be the ATR, developed by Wells Wilder, by the way.

So I basically divide my max risk for the trade by 10 and that gives me how many pips I can risk. I MUST risk that number of pips or less to be able to enter. There’s a lot more to it, but that’s the basics.

AND of course, the MACD (and histogram) give me divergence patterns that I want to see so I know the market is talking to me.

In Summary…

So, quickly here, we have the GBP/USD appearing before the markets opened for the night (yes, this is Sunday) as if there was still strength in upward moves. While there was one divergence pattern saying the market could come down, that one pattern was poisoned by a very strong ADX (the double-high, to be covered another time) in the wrong place.

A little bit was covered on the waves, but those will really have to be covered over the course of a week or two down the road. The ATR did not show that the market wanted to relax much because the volatility was decreasing, rather than increasing on the chart discussed. And I’ve got to get this posted…

If you have any questions or comments or criticisms, I’m open. I’ll answer, respond, or belittle you as required. LOL

And don’t try using this stuff in your own forex trading until you have successfully managed a paper trading account with it over sufficient time to know if you CAN use it profitably. Got it? If you try, and you have not successfully managed your own paper trading account with the info on this site, guess what? Yep, I guarantee that you will lose money. (Okay, I could make that guarantee and be right for like 97% of Forex traders, right?)

Anyway, have a phenomenally fantastic week in trading. More tomorrow! See you then.

No pics or video today. Just the rules. Keep in mind that you have to be using an oscillating indicator to use divergences. Examples of oscillating indicators are MACD, Smoothed RSI, Smoothed ROC (Rate of Change), Slow Stochastic… And you must have the ability to look at multiple time frames. We won’t be using add-ons in this basic model. Those are for another time.

The purpose of this is to give you a simple, basic trading system that you can practice managing on paper.

I won’t here get into the risk management or money management aspects, but will on another post. Just pretend it’s one lot and your account is big enough to take the loss from peak to valley, or valley to peak of the trade. (I use 2/3% account as unit size - yeah, I’m a chicken, but I never risk more than 2% on any position, so…)

0. Peaks and valleys are found on the largest weakness chart in the sequence, just below the smallest future strength chart. If you’re on the 60 minute chart, the next smaller chart is the 20-minute or 15 minute. The next bigger chart is the 3 or 4 hour chart, where one bar represents the price action of a 3 or 4 hour period.

1. See if there exists larger chart future strength divergence, combined with at least 2 smaller chart past weakness divergences that say the market looks like it wants to reverse recent price direction. On the larger chart, the trend direction must be the same direction as the trade. (If you don’t know what I said for this rule, go back to an earlier video in this series.)

2. If not, there is no order placed.

3. If so, choose the closest peak (if future strength direction is up) or valley (if future strength direction is lower), and set a stop just beyond the peak or valley. If long, be sure to add in the spread for the currency pair, too. The stop for the trade is the opposing directions last peak or valley.

4. When you’re in the trade, and the market moves beyond the next peak, move your stop to just beyond the last opposing peak or valley.

5. Once the market moves farther in your direction, moving past 2 peaks (or valleys, if you’re short) which were made while you have been in the trade, tighten the heck out of your stop, or exit. (Only choice you get.)

And that’s it.

Practice well, and have a phenomenal trading day.

Welcome to Domination Trading! This site will not only teach you about being a great currency trader, but if you’re bright enough, pretty much how to dominate the Forex market of your choice.

What is planned for this site is nothing short of ground-breaking, and could change the face of Forex trading for a long time to come. The principles that will be taught by me (and hopefully others will contribute, too) are the foundation of all successful trading, and will be built upon into anything you want for yourself.

With all of the so-called “trading systems” out there, and I’ve personally bought, studied and tested over 250 of them in the past 14 years, only two were actually complete trading systems. Two out of over 250 - which is less than 1%. Well, that isn’t right.

The basic philosophy, the foundational philosophy, to the forex trading systems coming, all start with basic risk, money and profit management. That IS the foundation of all great trading. And the discipline to take the required actions when told to by the system that you’re using.

That boils down to trading system management. A lot more of that is forthcoming. I beg you to ask me questions so I can make you videos, write more content that you want to read, and direct you to becoming the best trader you can possibly become. There’s a lot involved. There’s a lot to learn. There’s a lot to know about currency trading in the Forex markets.

Let’s get a good start tomorrow. So register, comment, and tell people about this site… More is on the way.