Your Trader “Training Wheels

As I mentioned yesterday, there are really only a handful of rules you need to learn so you can use charts in your Forex trading. Or in other words, start “technical trading.”

Why do you want to trade technically? Well, in my opinion, studying a currency’s fundamentals will only get you so far. Once you narrow down the 60 or so tradable currency pairs by evaluating their fundamentals, then you have to start looking at these currencies from a technical perspective.

In other words, you need to compare their charts to see emerging trends. Otherwise, you may never be able to narrow down the choices far enough to choose the absolute best currency pair to trade.

1. The trend’s direction is THE most important indicator out there.
As such, you want to follow the trend until it ends (with the simple-day moving average). Today, I want to introduce you to the second rule…

2. EVERY indicator that you use needs to be interpreted in light of that trend’s direction. This means you only ever enter a trade that’s going in the direction of the trend, and ignore counter signals altogether.

How to Use These Two Rules to Your Advantage
As I said yesterday, to use rule number 1, you should always follow a currency’s trend with the 50-day moving average.

So today, let’s look at how to interpret one other indicator in light of the trend’s direction (rule #2 from above).

Pay attention to the moving average’s direction/slope FIRST and only act on signals that are going in the favor of that trend (sell signals in a downtrend and buy signals in an uptrend).
Check out the chart below. I’ve added in the Slow Stochastics indicator to the chart so you can tell when it may be a better time to sell short (overbought signals) and when may be the best time to buy (oversold signals).