To determine that the currencies are setting properly in the trending market, I utilized three moving averages; 20 period SMA, 60 period EMA and 200 period EMA. The three moving averages should be in a proper order in and uptrend and downtrend.
For up trending prices;
1. prices are above the 20 SMA
2. 20 SMA is above 60 EMA
3. 60 EMA is above 200 EMA
In the event of downtrend, the proper order should be as follows;
1. 200 EMA is above 60 EMA
2. 60 EMA is above 20 SMA
3. 20 SMA is above the prices.
The usage of 50 SMA the previous post) and 60 EMA give me an indication of a rallying point for a price to remain either below or above it at 1 and 5 min time frame. In a downtrend prices are always below the 50 or 60 moving average and in the uptrend prices tend to remain over it. Once the 60 EMA crosses the 200 EMA from below going up, it give us confirmation of a bullish mood. On a 1 min time frame chart, the golden cross could netted a 30+ pips moved to one direction, and vice versa for short moved.
The 60 EMA and 200 EMA acted as support and resistance and usually prices come, touch it and bounce back, indicating that it is a strong level to buy if if it is in a uptrend and sell in a downtrend.
The 200 EMA is a more powerful moving average and it is like a barrier which prevent prices from breaching it, and if it is breached, price can come home with a 50+ pips in the direction of the change.
Currencies or forex market is a volatile market. This volatility move in cycles, in other word, period of high volatility tends to be follow by period of low volatility. A high volatility in a higher time frame will showed a up and down prices movement in the lower time frame i.e. trending upward and downward while low volatility will be a consolidation of prices at a tight range.
In the chart below, on the left of the chart i.e 19:30 to 29:00 there is a low volatility with prices moving sideway. Many traders used moving average to indicate volatility. During this period the 20 SMA(green) and 60 EMA(blue)moved sideway as prices consolidated before the uptrend. After a golden cross of 20 SMA and 60 EMA prices moved upward to test the 200 EMA(red) which clearly showed the alternative prices volatility from low to high. This volatility is captured within the .the Bollinger Band (BB).
The Bollinger band tries to identify periods when prices is overextended. If prices touched the upper band it can be considered overextended on the upside or overbought, and on the other hand, if prices touches the lower band the prices is overextended at the bottom or oversold. Note: during a trending market these technique is not applicable. At the chart from 20:22 to 20:40 prices stayed within the upper band and the central moving average-20 SMA therefore prices closed above the upper band in the uptrend are not reversal signal. A trader should wait for the price to turning the opposite direction after touching one of the bands before considering that a reversal is happening. It is better still if prices closed below the 20 SMA for indication of reversal. In conjunction with other indicators we can alos identify potential reversal points.One of the other great advantages of Bollinger bands is that they adapt dynamically to price expanding and contracting as volatility increases and decreases. Therefore, the bands naturally widen and narrow in sync with price action, creating a very accurate trending envelope
Bollinger bands (BB) help us to measure a market’s volatility. Basically, BBl tells us whether the market is quiet or whether the market is LOUD! When the market is quiet, the bands contract; and when the market is LOUD, the bands expand. Notice on the chart below that when the price was quiet, the bands were close together, but when the price moved up, the bands spread apart. . When the bands “squeeze” together, it usually means that a breakout is going to occur. If the candles start to break out above the top band, then the move will usually continue to go up. If the candles start to break out below the lower band, then the move will usually continue to go down.
