(1) I have mentioned this earlier, and I’ll restate it here with some more emphasis. S.E.X. lines are NOT meant to be used alone as your only tool for making trading decisions. Making the decision to enter into a trade MUST be based on a combination with other technical analysis “reasons”. S.E.X. lines are an excellent indicator to show the relative strength of a trend, including probable trend beginnings and signaling an anticipated trend ending. Use them to help you see potential trading opportunities and to monitor active trades, but be sure that you also look at the “big picture” presented by multiple technical analysis methods to get a better impression of likely market behavior.
(2) Notice that the above examples of using the combination of 5, 20 & 60
S.E.X. lines on daily charts have been on EUR/USD and GBP/USD. This is
because I have found that on these particular currency pairs this specific
technique variables work rather well. In my previous book “Forex Surfing” I
emphasized that each currency pair has it’s own “personality” (please reread
that discussion). Due to their distinct personalities you’ll find that a 5, 20 &
60 combination of S.E.X. lines will have varying “accuracy” on different
currency pairs. The most common “problem” I have noticed on some
currency pairs is that retracements in a trend are often large enough to signal a
trade exit based on the above mention “ending” techniques. You need to
spend some time studying the charts of the currency pair you would like to be
familiarized with in order to get a good impression of it’s natural
personality. Put the S.E.X. lines over the currency pair of your choice looking
at daily candles over the past 10 years. Zoom in sufficiently to be able to
clearly see the candles and the lines. Starting at the left side of the chart
slowly pan to the right studying the properties of bunches, separations and
endings. Repeat the study by replacing the 20 S.E.X. lines by 10 and 30 to see
how these variations appear to work on your chosen currency pair. Look at
every trend that has developed over the past 10 years to see the characteristics
of how it developed, progressed, ended, and see whether an aggressive or
more relaxed trailing stop would have yielded better results. Spending a
couple of hours doing this should get you to become familiar with the
currency pair’s personality, and have refined the S.E.X. technique to be better
adapted for this currency pair.
(3) I didn’t adequately cover this earlier, so figure that here can be a good
place to further discuss the purpose and value of have both the Simple and
Exponential moving average lines. Generally speaking, the Exponential line
of the pair of lines is considered to be the “money line” as it is usually closest
to the spot price, however the term “Money Line” is to be considered to be the
smallest Exponential line (the 5 Exponential line in the examples
above). Why do we have the 5 Simple line as generally these lines are so
close together that it is almost disregarded? It is there as it shows the shortterm
direction (which side the Exponential line is on), the relative strength of
the momentum (by how diverged, or far apart, the lines are), and quickly
responds to market slowdowns, or more importantly, to market turn
arounds. The same is similarly true with the larger period S.E.X. periods,
however your 20 S.E.X. lines are more for mid-term, and your 60 S.E.X. lines
are more for long-term. An interesting characteristic that you should notice
especially on the larger S.E.X. lines is that after the market reverses the
Simple line keeps on moving in the direction of the trend, whereas the
Exponential line more quickly responds in moving with the reversal. If you
were relying on just one moving average line (either Simple or Exponential)
as most traders do then which should you choose? Each presents a slightly
different picture, however you don’t have to just pick one or the other as you
can benefit from both of them… and to use the cliché here (“greater than the
sum of it’s parts”), using both presents more information than the value of
both used individually.
(4) Someone once asked me why not simply change the charts from
displaying candles into showing a simple line chart. Obviously you can get a
nice view by simply having the spot line intermingled with the S.E.X. lines. I
recommend against this because you loose a dimension of information that is
presented by the candles; the candles give you a wealth of information if you
read them correctly. Furthermore, a price line only gives you a shallow
perspective of price movements, not showing any spikes. A final reason is
that by having 7 lines on the page it is easy to loose perspective of where the
price it, but candles clearly keep this in view. To conclude feel free to try out
using a simple line chart, but sooner or later you’ll come to the same
conclusion and you’ll revert back to the candle view.
(5) I have mentioned my reasons for using specific periods for various S.E.X.
lines, but it is important for you to realize that though the choice to use MA
periods that correspond with calendar based timeframes is still arbitrary. Yes,
by using periods that correlate to timeframes considered significant to man
(i.e. weeks, months, quarters, etc…) does appear to be useful for a number of
reasons (i.e. certain key Fundamental Announcements occur on regular
timelines) there is nothing intrinsically magical about using those specific
numbers for your periods. Could you use “17” or “24” as opposed to “20” on
your daily charts? Sure you can! I believe that using certain key numbers
correlating to calendar time is better than any other number (and I’m sure that
many experienced traders would agree), however there is nothing wrong with
using numbers that don’t have any obvious correlations as long as it seems to
work for you. Furthermore, I said that I use “20” because it correlates with a
one month period (minus weekends), but that is actually inaccurate. 20 might
work for the month of February (except for leap years), but all other months
have 30 or 31 days, and so 20 isn’t really equal to a month, and by extension
60 is even more inaccurate to be called a “quarter” (of a year). In conclusion
you use periods that make sense to you to use by whatever logic seams
reasonable to you. So feel free to play around and experiment a bit
(remember, playing around with your charts and spending time with them is
the best way to learn to train your eyes to recognize trading opportunities, plus
experimentation leads to new innovative trading methods ).
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