New technical analysis (ROC, RSI, Stochastic, MACD) is not part of my trading strategy; here is why:

1. They make trading currencies much more difficult than it needs to be. Even the Federal Government recognizes that currencies trend well; few argue that forecasting exchange rates using simple moving averages is much more effective than using fundamental analysis as a basis. So why complicate it?
2. Like fundamentals, there seems to be a lot of gray area requiring subjective interpretation when utilizing the new technical indicators. So why use them?
3. These are momentum indicators. They try to determine if a move will continue or reverse by comparing near term rate of change, to rate of change looking further back. My personal view is that the price action in the spot currency market is not pure price action indicative of a currencies true current value. Rather, the current spot price reflects the general price direction and also incorporates all the little nuisances going on around the current price. Examples of nuisances include the actions of central banks and option traders (more on this later).

Lets talk about charts and moving averages.
In the medium and long term, the clearest and simplest indicator of a currencies future movement is the general price direction; in technical analysis it’s called the trend. It’s a fact that currency trends are sustained and persist for long periods of time. When you think about what a currency value represents – essentially the aggregate performance of past and present Government and the economy it overseas, since day one (more than 250 years in the case of the U.S. dollar and more like 1,000 years in the case of the Euro); you realize that there is no one event other than nuclear war that will in itself change the long term trend of a major world currency in the short-term.

It helps to think about the major currencies as ocean liners. There direction can only change gradually. There is no mechanism to make a sharp 180-degree turn. There is clearly a maximum speed in which a 180-degree turn can be accomplished. What’s most important for trading purposes is that if you focus on the big picture (watching the ocean liner from an airplane for example) there comes a point where it becomes obvious the boat is turning and accordingly its future direction is known in advance.

We will continue this analogy relative to what’s going on with the U.S. dollar at the present time under a different heading later on. For now lets talk about charts, trend lines, and moving averages.


Charts
Albert Einstein once said “We must learn to differentiate clearly the fundamentally important, that which is really basic, from that which is dispensable, and to turn aside from everything else, the multitude of things which clutter up the mind and divert it from the essential”.

We like that idea. When we look at a chart we keep it simple. Is it going up or is it going down. We don’t concern ourselves with trading in the direction its NOT going. We leave that to the new age traders, armed with their sophisticated computer driven technical indicators. We don’t concern ourselves with whether it’s going up as fast as it was earlier; we don’t care. What we do care about is that it is going up and we focus on finding the right spot to buy.

To help us in our quest to find a high probability of success entry buy level we look to charts. Not exclusively, but an important part of the puzzle. Ideally, the long-term charts (months to years) indicate buy but for day trading it’s definitely not essential. More importantly for our day trading purposes we want the intermediate trend charts (weeks to months) to indicate buy; once again it’s important but not essential.

Most importantly, we want the short-term charts (days to weeks) to indicate buy; this is essential, we want to be trading in the direction of the prevailing trend most relative to our very short-term trading style. We determine short-term direction by looking at an hourly chart covering the last couple of weeks. If the direction is clearly up we are done looking at the hourly charts. We know the prevailing trend. We know we are looking for buy trades only today.

We also know that we work with very tight stop losses so to find our buy entry points we need to focus on 15 minute and 5 minute charts. Experience has taught us that a good moving average to use is 60 periods. This is not what most traders use. That’s OK with us; we prefer not to have a lot of company at our entry points.

We only consider entry point trade signals that occur between GMT 07:00 and GMT 17:00. We are particularly keen on trade signals that occur between GMT 07:00 and GMT 08:00 (European opening) and GMT 12:00 and GMT 13:00 (U.S. opening). We pay particular attention to trade signal that are triggered by scheduled economic releases, statements by government officials, and world events.

We want to make it clear that we trade exclusively in the direction of the prevailing trend, we trade signals generated exclusively between GMT 07:00 and GMT 17:00, and narrow the importance of signals further, pinpointing scheduled economic releases, statements by government officials, and world events.

Lastly, we view the trade signals during our prescribed hours as a starting point; we don’t blindly trade every signal. In fact we trade very few signals.


Note:

Jimmy Young is a seasoned institutional forex trader having 20 years of experience with different banks. He headed up bank FX dealing rooms. He is FX profitability consultant to major European private bank. He manages funds and also trades personal money. Between 1981 and 2004 he was a foreign exchange trader at following banks: Societe Generale, Julius Baer, Fuji Bank, Indosuez, Erste, Hill Samuel, Manufactures  Hanover, Paribas, European American. www.EurUsdTrader.com