By Russell Glaser – The euro is beginning to stage a comeback against the dollar as the EUR/USD has come off of its lowest point in four years. For those traders who have been bearish on the euro and using a simple trending system as is described below, the time has come to close those positions as a technical indicator is providing a signal to liquidate.
One of the easiest and most common trending systems to use is the Double Crossover Method. This simple system uses two moving averages. The most-used combinations are the 5 and 20 days, along with the 10 and 50 days. Some traders also prefer to use a different moving average. Some prefer the exponential moving average or the weighted moving average.
For the EUR/USD daily chart below, we will be using the 5 and 20 day simple moving averages.
A buy signal is given when the faster, 5 day moving average (green) line crosses above the slower, 20 day moving average line (red).
A sell signal is given when the faster, 5 day moving average line (green) crosses above the slower, 20 day moving average line (red).
Since December when the current bearish trend began, the system has provided 4 signals to sell the EUR/USD. The respective time periods a trade would have remained open would have been noted on the chart below.
I don’t advocate opening a trade in the direction of the signal every time. Obviously those traders who opened at the short signals would have faired much better than those who opened only long positions, or those who opened at every buy and every sell signal.
Certainly other parameters must factor into the equation before a trader takes a position in the market. As the markets may only be in a trending phase 50% of the time, with the other half of the time spent in a range trading period, traders need to identify where the long term trend is and if indeed the market is showing signs of a trending environment.
One tool for identifying the trend is the ADX indicator. This discussion won’t dive into the specifics of the ADX indicator, but it is used to identify a trending environment versus a range trading environment.
Looking to the far right edge of the chart below, traders can see the 5 day moving average line crossing above the 20 day moving average line. Once a cross is made, this is a signal to close out short positions.
Instead of immediately opening a new long position, traders may want to wait for the next time the 5 day moving average crosses below the 20 day moving average, and go short.
Forex Market Analysis provided by Forex Yard.
© 2006 by FxYard Ltd
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