September 24th, 2015
by Sam Evans, Online Trading Academy
When I am working with new students at the various worldwide campuses across the Online Trading Academy network, one of the common queries I receive is with regards to how our patented rule-based core strategy works alongside traditional methods of technical analysis.
For those individuals who have had some experience with studying charts before coming to one of our classes, it can often be almost alien to them when we start to teach on naked price charts alone. You see, most forms of trading and investing education focus their methods and approaches upon more traditional methods of finding low risk high reward trading opportunities. Not that I'm saying there's anything wrong with this by any means; however, we can put ourselves at a major disadvantage if we are not aware of how the more conventional methods of analysis can trip us up if we're not careful.
If you are struggling with this concept then I invite you to think about it from this perspective: every single trade charting software out there has literally hundreds of technical analysis tools built into it and these tools cost us absolutely nothing to apply to our charts and begin using right away. From a purely logical standpoint, I believe it makes sense to question just how worthwhile these tools could be if they are basically free? Now don't get me wrong, I am not saying that classic indicators like moving averages, stochastics and oscillators are a waste of time. It just tends to be the case that most people have not really been taught how to use them in a worthwhile fashion; and by that I mean implementing them on your charts when you actually understand price itself and how it behaves on a day-to-day basis.
If you were to take a class with us you would learn how to identify the most important elements of any price chart, namely supply and demand, and how to recognize where the greatest imbalances are present on price charts. Simply put, price will always be the only true leading indicator. When you understand this, you can simply combine this knowledge of where the biggest banks and institutions are placing their orders in the markets to buy and sell currency with the use of supporting indicators. This is how we find our supply and demand levels and these levels are always our foremost reason to enter any trade.
Now let's talk about bringing those supporting indicators into play to compliment the core strategy. Here at the Academy, we prefer to call technical indicators "analysis tools" because this more objectively describes what they are intended to do. Technical indicators alone should never be the only reason why you buy or sell in the market, yet they can be a highly effective tool to help you find the very best trades and filter out the ones that may be better to pass on. Think of them more like an advanced filtering tool as opposed to a reason to buy or sell alone.
When considering the multitude of indicators available to us, Bollinger Bands® are without a doubt one of my favorite tools for cross-referencing my supply and demand levels. When John Bollinger invented them, he created a tool which measured overbought and oversold conditions in the financial markets and he did this by basing the bands on a simple 20 period moving average and then applying two further moving averages above and below the original one at +2 and -2 standard deviations. By creating these bands, we now have a projected price range based on the current average. While the concept of Bollinger Bands® is simple in nature, they are often used blindly. Let's take a look at such an example:
As you can see in this chart of the EURUSD currency pair, prices went overbought around 8/21 and then continued to stay that way, continuing the uptrend for the entire week. To have focused on getting short on the pair simply because the bands were overbought would've been costly had you not used a stop loss. Personally, I have found that in strong trending markets the Bollinger Bands® are not often useful. However, one of the ways to effectively use an analysis technique is to know which conditions to apply it to. As strange as it may sound to some of you, my favorite market conditions are when we have a range-bound scenario. Buying low and selling high is my trading dream come true. By implementing the Bollinger Bands® in these conditions, we have a fairly powerful tool at our disposal. Let's take a look:
In this example on the EURGBP, we notice that the market has been pretty much range bound for almost four weeks. As much as I like ranging conditions, I need to make sure that I am buying and selling in the range at the most extreme areas, as it is very easy to get caught in the middle. One way to overcome this is to use the Bollinger Bands® as a guide of when prices are extremely overbought and oversold. When these conditions are met, I can then use my understanding of institutional supply and demand levels which allows me to cross reference specific entries, stop losses and targets.
If the market doesn't go overbought or oversold, then I pass on a trade and wait for the ideal set up to present itself. This gives me an objective way to make sure that I get the very best prices as low as possible and as high as possible, while the supply or demand level itself gives me the specifics for my entries, risk management and profit targets. It all wraps up quite nicely into a very simple ranging trading system when we know what we're looking for. To me and my fellow colleagues and students, institutional wholesale and retail price levels are always the first and foremost reason to consider a trade in the Forex markets, while the Bollinger Bands® give a simple yet powerful filtering tool to help define the very best conditions in which to trade. Always try to remember that price and price alone should be the first thing you consider when looking for a trading opportunity, before adding on any other technical indicator. Remember this and you shouldn't go too far wrong.