Articles

THE INTRADAY TRADE

(MA application in combination with other indicator (MACD))

Here’s a low-risk/high-profit trend-following method that you can apply to the forex markets.

The idea of a short-term trade itself is very attractive, just like a romantic trip to the sea. It’s very alluring to sit by the computer for an hour or two when no one distracts you, and earn money getting pleasure from your work. But there are pitfalls on the way to success. One of the major ones is not having a system-defined trade that results in a lack of consistency in your trades. You must understand that any trade must have a plan of action, and your task is to follow that plan without inventing new rules impulsively. Keep on that plan and you’ll be more likely to achieve success and join the elite group of professionals that really make money. So how do you get into that elite group? Here is a system you can try, by applying to intraday trading.

INTRADAY TRADING

When I refer to “intraday trade,” I mean opening a trade within a 24-hour period. If you are going to should take these rules into consideration:

• Time is money. When trading intraday, you need to act immediately when you get a signal. All the rules you checked and tested based on historical performance and the demo account you paper-traded in the comfort of your office should be applied to the real account automatically. If you hesitate, you will miss out.
• Your spirit. Making short-term trades takes plenty of energy, but at the same time, you should be diligent. You must wait for the right moment and then make quick decisions. If you’re not on your toes, you’ll regret it.
• Tough discipline. You have to have a precise set of rules for opening and closing your positions. Intraday trading often attracts those who are excited about the possibility of making lots of money, but without a system in place, failure is inevitable. Inventing new rules on the fly will not work.
• News. You must keep track of when the news that cause market movements is released. You may want to print out an economic calendar and always have it on hand. Before any significant news is released, you should close all open trades or at least protect them with a stop at the breakeven area. Open new positions only after the news is released.
• Spread (Commission). Spread is relevant when trading currencies intraday. It’s more convenient to work with a currency pair that is active enough and has a small spread. This is because in an intraday time scale, spreads could eat up a considerable part of your profit.
• Length of time in the market. Besides price, you should also take into consideration the time you stay in the market. “Short-term trade” means that you stay in the market for a short period of time. If after a while your trade doesn’t achieve its objective, at the very least, protect it with a stop where you break even.

BASIC SIGNALS

For the basic signals we use the exponential moving average EMA(8) and EMA(21) based on the close, and the moving average convergence/divergence MACD(12/26/9), with the default parameters. Perhaps the most important task set in front of every trader is to define the dominant trend and trade in its direction. To do this we use the EMAs. The indicator eliminates noise and shows the major direction of prices which, despite its drawback - a delay - is a useful tool. In addition, moving averages are easy to interpret. You get a major signal at the intersection of the moving averages. If EMA(8) crosses above EMA(21), it is a buy signal. If EMA(8) crosses below the EMA(21), it is a sell signal.

I prefer to define the signal according to the candlestick close. After getting a buy signal, I wait for the candlestick to close above the moving averages (Figure 1). Similarly, after the sell I wait for the candlestick close to be under the moving averages. This confirms that the signal is stable.

FIGURE 1: A BUY SIGNAL. After getting a buy signal, the trader must wait for the candlestick to close above the moving averages for this technique.

CONFIRMING SIGNAL

After the crossing of the EMAs, we can identify an ascending or descending trend. Now let’s remember the essence of the moving average indicator; it’s an average price value for a certain period of time.

Imagine the following situation. You go to a shopping mall to buy a pair of jeans. You know that the average price of the brand you want is $50. But when you see what you want for $80 instead, you decide not to buy a pair and continue looking, even though you know it is unlikely that you will find the same jeans on sale for $30. Similarly, as a trader, if you missed the buy signal and the crossover of the moving averages already took place, you may want to wait for the price to return to EMA(8) to open your position (Figure 2).

FIGURE 2: PLACING YOUR TRADE AFTER THE EMA CROSSOVER. The idea is to buy or sell in the direction of the moving average and to place a trade as close to the EMA as possible.

You need to pay close attention to the correlation change between profit and risk in all your trades. Many beginning traders are familiar with several profitable trades being eaten up by one severe loss. But if you follow the tactics shown in Figure 2, you’ll probably manage to have a positive balance, even if two deals turn out to be unprofitable out of three.

After the intersection of the moving averages, how long should you wait for price to return to the EMA? This is where the MACD comes in. The buy signal is active as long as the MACD histogram is above its signal line (Figure 3). The sell signal is active till the MACD histogram is under its signal line.

FIGURE 3: CONFIRMING SIGNAL. The buy signal is active after the EMA crossover and for as long as the MACD histogram is above its signal line.

To set your stop-loss, you can use the following options:

• If you can follow the market, you should exit your long position when the candlestick closes under the slow EMA. Conversely, you should close your short position when the candlestick closes above the slow EMA.
• You could also set a trailing stop-loss. At the time you place your long trade, you should move the stop-loss a couple of points lower than the last bar’s low. For a short position you should move the stop-loss a couple of points higher than the last bar’s high, taking spread into consideration (Figure 4).

FIGURE 4: TRAILING STOPS. After buying near the EMA, the stop-loss should be moved just below the last low.

It’s important to understand that this technique works well when price is moving in a trend. So before placing a trade, you must determine what direction the trend is moving at the moment.

Your answer could be one of the following: 1) ascending; 2) descending; or 3) flat — and there’s one more possibility. Sometimes you will find situations about which you can reply, “I don’t understand where the trend is moving.” This is the fourth possible answer, and it is often useful. No one can force you to click the mouse to make a trade.

And therein lies the difference between a professional trader and an amateur one. The latter tends to trade every time he/she sits down at the computer, whereas the professional sometimes doesn’t make any trades at all during a day or even a week.

It is best to define the trend on a larger time frame than the one you’re trading in. For example, if you’re trading using a 15-minute chart, you should check the one-hour or four-hour charts to see the direction of the trend. I believe that a good trend can be seen with the naked eye, but you could use the following tactics as an alternative (see Figure 5):

FIGURE 5: INTRADAY TRADING. Using the EMA and the MACD histogram will help you make profitable trades where your rewards outweigh your risks.

• Make trades on the 15-minute or five-minute charts till the prices for every MACD histogram column on the onehour and four-hour charts are higher than the previous one.
• Make trades at the 15-minute or five-minute charts till the prices for every MACD histogram column on the onehour and four-hour charts are lower than the previous one.
• If the MACD histogram of the one-hour and four-hour charts fluctuates, it is best to avoid making trades till something concrete develops.

These are not the only possible options. You should find your own parameters for each financial instrument and perhaps even for every time interval you trade by looking at its historical performance. It is labor-intensive, but at the same time, you can get creative. You can also choose your own tactics for defining the trend.

The approach presented here is not a mechanical trading system. The task is to try to open buy and sell positions that are close to the moving average and to achieve a good profit and risk correlation. You can use this approach in markets that are moving in a strong trend as opposed to one that is moving sideways.

Alex Sabodin.
Pro Finance Group Inc.