S.E.X. LINES forex

Yes, a lot of Forex trading tools are quite “sexy”,

however this one is really

simple, yet surprisingly powerful. S.E.X., as I lik

e to call it, stands for

“

S

imple /

E

xponential crosses (

X

)”.

A lot of traders use “Simple Moving Averages” (SMA fo

r short) and/or

“Exponential Moving Averages” (EMA for short) as pa

rt of their trading

toolbox, however here I’ll show you some adaptation

s I’ve come up with

using these basic indicators. Chances are that eve

n if you are an experienced

trader you haven’t used this or a similar technique

, and will probably be rather

impressed by the power of it.

A lot of traders are familiar with the concept of m

oving average crossovers,

but like I said before the S.E.X. technique adaptati

on of MA crossovers goes a

little bit further than most people have ever consi

dered, as I’ll explain.

It is common to have two SMAs or EMAs of different p

eriods (i.e. a 10 period

and a 20 period) and watch as they cross over each

other. As the shorter

period crosses over the longer period it shows the

direction that the market is

trending in. If the shorter period (i.e. 10) is ab

ove the longer period (i.e. 20)

then it is because the market has been moving up.

If the shorter period is

below the longer one then it is because the market

has been moving

down. Again, this technique is commonly used by tr

aders, and most traders

know of it’s limitation – the limitation is that MA

crossovers are a “lagging

indicator”. Lagging means that it shows the direct

ion the market is moving in

AFTER it has started to move in that direction. Thu

s MA crossovers aren’t

some kind of psychic predictive tool, however it st

ill does serve the purpose to

help you spot when the market changes direction to

be able to respond

accordingly.

Let us now begin to explore how the S.E.X. lines tec

hnique works. You’ll

soon see how it resembles yet differs from standard

MA crossover

techniques. We’ll start by looking at it’s simples

t aspects and then progress to

more detailed variations. 

MOVING AVERAGES forex

Moving Averages (MA for short) is a very basic indi

cator known by just

about every trader. If you haven’t heard of it by

now then you must really be

a newbie to trading. Because of it is so commonly

known I won’t go deep

into this subject, but will touch upon it for two r

easons. (1) To introduce it to

those who aren’t yet familiar with it, and (2) to e

xplain the basics of it as it is

the foundation of “S.E.X. Lines”, which is dealt wit

h in the next section.

Ok, the next few paragraphs are for those of you wh

o are new to trading to

understand what an SMA and EMA is. If you already

know about these then

just skip down a bit to get to the juicy part, or b

etter yet just read it as a little

refresher.

An SMA, which stands for “Simple Moving Averages” (so

me folks and

charting packages simply refer to this as MA or “Mo

ving Averages” as the

“Simple” is just implied) is a basic indicator your

charting package will

display over your charts. It draws a line showing

the average price over the

past x number of periods. Lets say you are looking

at a one hour chart (each

candle represents one hour) and you set your SMA to

“10”. What it’ll do then

is it will add the closing price of the previous 10

candles and then divide the

sum by the number of periods, in this case 10, to f

ind the average price from

the past 10 periods (ten hours in this example). T

his is a simple math

procedure you’ve learned to do in elementary school

. With each successive

period (new candle to the right) it redoes the comp

utation of calculating the

average of the past 10 periods by removing the last

candle (the now eleventh

candle to the left) and adding the newest candle’s

price into the average. It

keeps redoing this calculation for all the candles

displayed on your chart and

then plots the average prices onto your chart. Sinc

e the prices keep moving,

thus changing the average price, the line moves fol

lowing the current market

moves, hence why this is called a Moving Average.

The chart below has a

green line showing the 10 period SMA.

An EMA, which stands for “Exponential Moving Averag

e” is another basic

indicator your charting package will display over y

our charts. Like the SMA

described above it also creates a Moving Average pr

ice line on your charts

however the main difference is that the SMA compute

s a simple average

where each period is valued equally whereas the EMA

places more emphasis

on the more recent prices. As the more recent pric

es are valued more than the

older prices the “average” price tends to be closer

to the current market

price. The chart below has a purple line showing t

he 10 period EMA. What

is important to notice is that though both lines sh

ow the same moving average

period the purple one (EMA) is more responsive to t

he actual market

fluctuations, and you also see that it crosses over

the green line (SMA) after

the market changes directions

Some charting packages also have a WMA option. This

stands for “Weighted

Moving Average”. As explained in the previous para

graph discussing EMA,

the WMA places more emphasis on the more recent dat

a but the way it is

calculated is different. Feel free to experiment wi

th it if you want, but you’ll

find that all you’ll be working with are just the SM

A and EMA lines.

How are these lines used by traders? There are two

common ways (an

advanced method is exposed in the next section). M

ethod 1 is that traders pay

attention to when the market price crosses over a c

ertain period MA (usually

just one line on the chart). Method 2 is that trad

ers pay attention to when a

shorter period MA crosses a larger period MA (usual

ly two lines on the chart).

The chart above shows EUR/USD daily candle view. On

this chart I’ve put a

50 period SMA (the yellow line) and the 200 SMA (the

green line). This is to

illustrate “method 1”. Normally a trader would jus

t have one MA line (either

simple or exponential), but I’ve put two lines on t

his chart to contrast different

periods. Actually, what I just said is not complet

ely true. Traders often do

have multiple MA lines for this method simply to wa

tch when the market

penetrates through any of those lines.

With “method 1”, traders plot the MA lines on daily

charts (usually a SMA) to

watch when the market crosses the line. Common dai

ly periods observed by

many traders include 50, 100, and 200. Why these n

umbers? Well some

people may give you some nice sounding rational beh

ind these numbers but

truthfully they are just nice round arbitrary assig

nments; you could use weird

numbers like 47, 108, and 222 about as effectively.

Ok, I’ve heard arguments

that 50 and 200 statistically have performed with e

xcellent results to act as

significant resistance/support levels, and to some

extent would agree from

what I’ve observed though I didn’t conduct any stat

istical analysis myself.

A lot of trader’s resource websites make mention of

when the market crosses

these significant MA lines. Many traders consider

penetration of these MA

lines to be a significant event. Why? Well just l

ook at those lines on the chart

above. Notice that when market touches/crosses the

line that soon after the

market races off for quite some time (trending) bef

ore it eventually reconnects

with that same MA line.

There are many traders that ONLY trade based upon w

hen the market

connects with the MA line. This is such a simple i

ndicator, yet it is

sooooooooo very powerful, and if you were to only t

rade based upon this then

you would do quite well for yourself.

Earlier on I mentioned that there was another metho

d, “method 2”, of how

traders use these MA lines. This simply involves h

aving two MA lines (either

simple or exponential) an observing when the two li

nes cross. The chart

below shows EUR/USD hourly candles with a 5 period (

yellow) and 20 period

(green) SMA. The numbers 5 and 20 are commonly used

for this method on

various timeframes, but you can play around with ot

her combinations. 

WEEKLY & MONTHLY forex

Forex Sailing

Looking at the ATR(1) you see that 585 pips was the

biggest single week

during that 5 year period. Looking across most of

the other tops you get the

sense that the Usual weekly Maximum (UwM) would be

approximately 425

pips. Getting the AwR is quite easy because the en

d of the line points right at

the number in your ATR(104). Obviously the AwR is

244.

To find the Usual monthly Maximum simply call up th

e monthly chart over

the past 10 years of the currency pair of interest.

For this example we’ll

continue looking at EUR/USD.

Set up an ATR to show one period and a second ATR to

show 48 periods

(four years average). Your chart should look somet

hing like this:

Forex Sailing

Without much explanation (it should be obvious to y

ou by now), I would use

775 for my UmM and my AmR is 496.

Summary of Data

From all of our examples we now know the following i

nformation for the

currency pair EUR/USD.

UdM = ~ 200 pips

AdR = 112 pips

UwM = 425 pips

AwR = 244 pips

UmM = 775

Forex Sailing

Please remember that the above figures are correct a

t the time of this writing

and may not be at all accurate by the time you will

be reading this. Please

repeat the procedures to find all of these numbers

for EUR/USD yourself in

addition to any other currency pair of interest to

you.

Here are a few more words about finding the Usual M

aximums. This isn’t an

exact figure but really just an eyeball – if you re

ally want to you could take

the average of the say the 10 or 15 highest peaks (

this would generally yield a

higher number than the one you’d “eyeball”), but ul

timately an exact number

won’t be any more specifically useful than an appro

ximate one. What you are

looking for is an area that appears to be the maxim

um ceiling for the average,

though recognizing that there have been a few times

that this level has been

penetrated, and likely will get penetrated in the f

uture. I guess I should

instruct you to do it the “proper” way (taking an a

verage of the top dozen

peaks), and I’m sure that it would be somewhat more

useful information, but

telling you to do this would be rather hypocritical

of me since I personally

never do it.

Ok, so what are all of these ATR figures for? The

answer is simple. The

primary purpose of knowing the ATR of the candles y

ou are observing (i.e.

knowing the Daily average if looking at the Daily c

andles) is to assess the risk

and likelihood of the trades you engage to reach th

e success target. Later in

this eBook you will learn a variety of trading tech

niques, and for example,

some of them are based on the amplitudes (how tall)

of the day candles. If

your stop order is placed within the range of the D

aily average (AdR) then

there is a good possibility that you may get stoppe

d out by simple market

fluctuations. Knowing the UdM, and seeing how far

your stop order is in

respect to the UdM then you will know the likelihoo

d of a rogue large day of

stopping you out (but this will happen less often).

Conversely, if you are

doing a “Roulette” trade then you can similarly pre

dict how many days your

trade might last until you either get stopped out o

r limit exit for

profit. Knowing the Usual Maximums and Average Ran

ge of the Weekly and

Monthly perspectives offers you similar foresight a

lthough you are less likely

to engage in trades using such large stops, thus th

ose are mostly used to help

you to determine possible trade duration. 

ATR – Average True Range forex

This is one of the many indicators included in most

charting packages. This

indicator known as “Average True Range”, or “ATR” f

or short, basically tells

you the amplitude of each candle on your chart, or

more specifically for what

it is intended, it tells you the

Average

over a selected period. The ATR

indicator measures volatility but does not provide

an indication of price

direction or duration; it just shows the degree of

price movement or volatility.

This indicator was developed by some guy named “J.

Welles Wilder” and was

introduced to the world in his book “New Concepts i

n Technical Trading

Systems” (1978). It is important to recognize the p

eople who developed new

trading systems... especially as I would hope that pe

ople will mention me as

the brain behind all the techniques I have personal

ly developed (smile).

It is not my intention here to explain everything a

bout ATR, especially

because the way we will be using it is an adaptatio

n to figure out something

important to know for the trading techniques presen

ted here in this book. In

the next paragraph I’ll briefly explain what ATR is

, and after that I’ll explain

how we will be using it, but before I start explain

ing all that I need to make it

very clear to you that the ATR indicator is not a t

rading method, but rather is

just a tool to figure out some important facts that

will be useful information

for the trading techniques that will be presented l

ater in this book.

The True Range (notice I didn’t say “Average”), or

TR, is simply the range of

the period between the high and the low prices. Te

chnically speaking the

above statement seems to be inaccurate according to

descriptions I read about

TR in Technical Analysis Encyclopedias, but (and fo

rtunately because this is

what I really want) the Forex charts I like using se

em to provide the TR

according to the above description.

According to the definitions of manuals (usually wr

itten for stock &

commodities) the True Range (TR) is calculated by t

aking the difference from

the previous candle’s close to either the extreme h

igh or low of the candle

(whichever is the greater of the two). 

OCO – ONE CANCELS the OTHER forex

 Earlier I explained the variations of exiting a trade once you are already in a trade. The two ways to exit is to Stop for loss or Limit for profit. If you have a trade already engaged (say you manually entered at current market price) and if you want to have both a Stop for loss and a Limit for profit placed on that trade then you would use an “OCO”. OCO places the two entry orders (that would cancel the existing trade, either for profit or for loss) and once one of those two orders gets triggered then the other one just disappears (since it is no longer needed). This is why this form of order is called “OCO” because one of the orders will cancel the other (One Cancels the Other). If, for example (this is one of the four variations explained earlier), you are active in a trade going long (up) then you will set the OCO to have two orders; one as a Sell-Limit (above current market price – this is your Limit for profit), and the other as a Sell-Stop (below current market price – this is your Stop for loss). Here is what an order box looks like for this type of order: Forex Sailing 30 IF-DONE OCO This order type combines the “IF-DONE” and the “OCO” into one. Basically this is used if you want to place an Entry order (accomplished in the “IF” part) that has both a Stop set for loss and a Limit set for profit (accomplished in the “DONE – OCO” part). Just apply all the rules I’ve explained earlier for each part. Here is what an order box looks like for this type of order: Forex Sailing 31 TRAILING STOP One thing that I love about FXCM is that they have (relatively recently) added the ability to trail stops automatically against the trade you have entered. This is a wonderful feature that is very useful for a few types of strategies. Unfortunately not all brokers have automatic trailing stops, and those that do have different ways that they are implemented. ACM, the broker whose platform I am showing you here does have an automatic trailing stop, except that it is a separate order, thus you can’t tie it in with an Entry order (IF DONE OCO). Oh well, here is what it is and how it works (with them). You simply set a Stop order (as you’ve learned earlier) except here you have an additional option to set how many pips behind the market it is to trail. If for example you were to set a trailing stop behind your long trade (going up) for say 30 pips, then as the market moves up your stop will automatically readjust itself to remain that far away, so if the market eventually reverses you would get stopped out about 30 pips away from where the market peaked. Here is what an order box looks like for this type of order: 

ENTRY ORDERS - STOPS vs. LIMITS forex

In the above example we assumed you already had an active trade, and we just looked at how to exit that trade with either a stop or limit order. You might have entered that trade, for example, by simply doing a market order. But what if you want to do an “Entry Order” (the broker will automatically enter you into a trade once the market hits your predetermined price)? If you’ve played with FXCM’s trading platform then you know that they let you do so very easily, however with other brokers you need to do a little mental gymnastics. I’ve decided (after thinking about whether to do it or not) to not explain to you the reasoning behind why what I’m about to tell you is the way it is, as I think that it might only confuse you (at first). All that is important to understand is Forex Sailing 26 the HOW (not the why). Once you grasp the “how” later you’ll figure out the “why”. There are four (4) variations for placing an “Entry” order that you need to know, and here they are: 1. If you want to enter to Buy (go long) once the market hits a predetermined price that is ABOVE the current market price then you do so with a “Buy-Stop” order. (used if you believe that if the market moves up to that price that it’ll continue in that direction – example used: “Surfing” a wave top; pattern breakout) 2. If you want to enter to Buy (go long) once the market hits a predetermined price that is BELOW the current market price then you do so with a “Buy-Limit” order. (used if you believe that if the market moves down to that price that it’ll bounce back up – example uses: within-range trading; buying at the 62% Fibonacci retracement) 3. If you want to enter to Sell (go short) once the market hits a predetermined price that is BELOW the current market price then you do so with a “Sell-Stop” order. (used if you believe that if the market moves down to that price that it’ll continue in that direction – example used: “Surfing” a wave bottom; pattern breakout) 4. If you want to enter to Sell (go short) once the market hits a predetermined price that is ABOVE the current market price then you do so with a “Sell-Limit” order. (used if you believe that if the market moves up to that price that it’ll bounce back down – example uses: within-range trading; buying at the 62% Fibonacci retracement) Here is a diagram to help you understand this visually: Forex Sailing 27 The above can be used to place either a “Stop Order” or a “Limit Order”, but realize that once it is activated that you don’t have either a Stop set for loss, or a Limit set for profit (which you should have at least a stop set). What you have to realize is that though the words “Stop” and “Limit” are used to define those order types for entry you MUST understand that you shouldn’t confuse them with being a “Stop” for loss or a “Limit” for profit. The fact that those words are used to define two different concepts is what leads many people to confusion, so be sure to get these ideas straight in your mind. 

CONCEPT OF STOPS & LIMITS forex

Ok, here comes the fun part. Before I explain the other order types (i.e. OCO, If-Then, etc…) you need to grasp the concepts of “Stops & Limits”. Whenever you make a trade you will always be doing these three things. Let’s pretend you’ve gone “long” on a trade (you bought going up) then sooner or later you must exit that trade, and to exit a position that you’ve bought then obviously you need to sell your position. When you “sell” to exit your trade then you’ll either sell it for a profit or for a loss. As by now you should already understand, if you were to set an order to sell at a higher price for profit then you would accomplish this by setting a “limit order”. If you were to set an order to sell at a lower price for a loss then you would accomplish this by setting a “stop order”. All this should be obvious to you as well for the opposite direction if you were to go “short” on a trade (you sold going down). Sooner or later you must exit that trade, and to exit a position that you’ve sold (shorted) then obviously you need to buy your position. When you “buy” to exit your trade then you’ll either buy it for a profit or for a loss. If you were to set an order to buy at a lower price for profit then you would accomplish this by setting a “limit order”. If you were to set an order to buy at a higher price for a loss then you would accomplish this by setting a “stop order”. Here is a diagram to show you this visually.

So if you are already in a trade, either long or short (for example by doing a market order) then you will need to place at the very least a stop order (to protect you from unlimited loss) and possibly a limit order (to automatically exit at a predetermined profit). You can accomplish either individually or better yet by doing an “OCO” order (explained later). It is important to understand that you CAN NOT place a Sell-Stop order or a Buy-Limit order above the current market price, nor can you place a SellLimit order or a Buy-Stop order below the current market price. If you attempt to do so then your broker will return an error and the order won’t be entered. The correct order needs to be placed on the correct side. If you understand what I just said then congratulations for you (you’re a Mensa candidate), but if you are confused then just reread the above a few times until it sinks in.