Foreword

People rarely succeed unless they have fun in what they are doing - Dale Carnegie

My trading journey is what one call as a roller coaster ride. I was not trained in
finance. I was trained in the Information Technology field. Upon graduation a friend
of my girlfriend told me about his experience in trading stock. Somehow it unearthed
a curiosity in me to learn as much possible about trading stocks. Like all newbies, I
bought trading books and dove into the stock market. Within a short 6 months, I lost
close to USD 20,000. I was bewildered, how could this happen. I then studies
about trends and went to look for stocks where were trending. In about 6 months I
managed to get back almost all what I lost. This particular event started made we
want to study more into trend trading.

My style of learning is to learn how trend traders think. I bought books which
talked about how great trend traders think and behave. Mimicking them is one
certain way you would not go wrong. If you are into trend trading, you will definitely
come across the term turtle traders. The brain child behind turtle trading is non-
other than Richard Dennis and William Eckhart. The system taught by Richard has
been published in no less than 2 books. In the short 5 years, the turtles netted an
aggregate profit of USD175 million. His turtles (a nick name for his traders) has
gone to achieve much more after his experiment ended. They tweaked the original
trading system but kept the essence of trend trading. Until today most millionaire
traders are mainly trend traders. Thus by focusing your main trading system into
trend trading is something all traders should consider. One particular event stuck out
like a sore thumb and taught me to focus on trend trading. I worked as a market
analyst in a fund and during one particular conversation I had with the chief trader. I
asked him who do you think is the best trader you have ever seen? He said he has
never met the trader but this person or organization will always make one entry for
the particular instrument of trade and exit about 8 months to a year later. The trader
would ride the whole trend move and they have been successful for years. Now this
is really cool.

Thankfully, the market do not care if you did go to school or not, tall or short,
thin or fat, young or old, athletic or not, it only reward people who has perseverance
and a sensible approach in money management. This is one of my ebook about
trend. I really hope that the ideas presented here would benefit you as it has
benefited me.

- Justin Khoo
A Simple Moving Average that you never thought of

First of all to the newbies, SMA here means Simple Moving Average. The simple
moving average that is calculated by adding the closing price of the security for a
number of time periods and then dividing this total by the number of time periods.

Now anyone can just give any number and say that it is the trend indicator. First of
all, I do not use moving average like what you usually see from the books or articles
from the internet. Furthermore I will justify why I choose 21 as my simple moving
average and not some statement where it is a value generally used by big funds.

The explanation:
In a day, you have 24 hours. In a trading day, you will see that there are roughly 3
hours of market non activity. Thus for a more accurate average of the market, we
use 21hours instead making it 21sma

In a month, there are 30 days in general. Take away the Friday and Saturday you
have in a month which totals to 8 days, you have 22 days. Take away the hours of
non market inactivity in a day you need to take another day off, thus giving you
21days.

So you see, this is how I get my number. I use logic. When you use logic, you would
see that the value is widely usable for all types of instruments which we use to trade.
We do not need to use specific SMA values to tackle different instruments and also
different time frame. Its a one value for all.

With the conclusion derived, I then use the 21sma as the true average price of the
hour, month or year practically covering all time frames. So by studying the 21sma, I
am able to call the trend of the period. A simple way is to see the angle of the
21sma.
Uptrend:

In an uptrend, the 21sma would be slopping upwards. Usually you would see a
steady uptrend have a gradual upwards slopping moving average. Majority of the
prices would be trading above the 21sma during an uptrend. Unless there is a strong
close below the 21sma, the uptrend will still continue. A strong close here would
constitute a consecutive close below the low of the candle which first closes below
the 21sma.

Example of strong close above

Downtrend:

In a downtrend, the 21sma would be slopping downwards. Usually you would see a
steady downtrend have a gradual downwards slopping moving average. Majority of
the prices would be trading below the 21sma during an downtrend. Unless there is a
strong close above the 21sma, the downtrend will still continue. A strong close here
would constitute a consecutive close above the high of the candle which first closes
above the 21sma.

Example of strong close above

Range:

A ranging market would see the 21sma flat line. Prices would close above the 21sma
for a few periods before repeating the same price action by closing below the 21sma.
During this period of time one should stay aside or go to smaller time frame to take
advantage of the smaller time frame trends.

More detailed example of the strong closes above or below 21sma.

E F
C D G
H
B
A

From the price action, we can see that the price is in an uptrend. At candle A, price
first close below the 21sma. The next candle however could not close below the
21sma and price continued to trade higher. Price at candle B again close below
21sma. However the next candle and also its consecutive candle fail to close below
the low of candle B. Naturally price would trade higher. This scenario is repeated at
candle C, D and E.

At candle F however the relationship changed. Candle F closed below the 21sma.
The next 2 candles marked G and H saw price close below the low of candle F and
this effective ended the uptrend relationship of price and the 21sma.
This price close relationship is just a guideline on how price and 21sma behave. You
should not use this understanding solely to make trade decisions.
Type of price action you will see in a trend

The above chart is the chart of the EURGBP. The EURGBP has been in a prolong
downtrend. To know if price is in a trend and in this case a downtrend, we would
need to see price rejecting the 21sma and continue to trade lower. Now this is a
quick way to detect if the trend is going much lower in the case of the EURGBP pair
above.

Here are the steps for a downtrend:

1) First you have to check where the price first broke the 21sma from above to
below.
2) Then we need to mark the lowest point of the price before price rejected
21sma.
After plotting the charts according to the methods which I mentioned earlier, you will
get this. The red arrow areas are areas which price recorded the low just before
price tested the 21sma.

The grey horizontal lines are the lows of the price. So to see if this trend has a
chance to continue, you will need the price to close below the low of price action
which tested the 21sma.

Price low

Price close below the low

and downtrend continues
Here are the steps for an uptrend:
1) First you have to check where the price first broke the 21sma from below to
above.
2) Then we need to mark the highest point of the price before price rejected
21sma.

I have plotted here the uptrend of the GBPUSD chart according to the methods
which I mentioned earlier and I have this. The red arrow areas are areas which price
recorded the high just before price tested the 21sma.

The grey horizontal lines are the highs of the price. So to see if this trend has a
chance to continue, you will need the price to close above the high of price action
which tested the 21sma.

Price close above the high

and uptrend continues

Price high
How long will the trend continue
Personally like to trade during the first reject for an uptrend and the first reject for the
downtrend.

After a few rejects, the trends momentum becomes weaker. Usually I would not
continue to trade fresh trades after the third (3 rd) continuous reject of the 21sma.
Lets look at the example below.

Buying in an uptrend

3rd

2nd

1st

Price rejected the 21sma twice perfectly. After the 3rd rejection of the 21sma, price
momentum died down and price could not close above the high of the 3 rd rejection.
Price then continued trading sideways. There are times which price would reject
more than 3 times. However you just need to see the momentum after each rejection
to get a rough idea.

The other areas which you also need to study are the resistance areas. Buying near
resistance areas simply does not present a good risk and reward ratio.
Selling in a downtrend

In this example, price rejected the 21sma perfectly and the price sold for a while. The
second (2nd) price rejection however saw price momentum decrease. The same
price action was seen on the third (3rd) reject. At the fourth (4th) reject, we saw price
not able to close below the low of the previous low, thus we cannot continue selling
from this place as price action does not confirm further weakness in the trend.

Detecting the end of the trend

Diagram A
Diagram B

Have a good look at diagram A and diagram B. What do you see? The answer.
When prices actions shows the 3rd reject and onwards, the price momentum starts to
wane. This is what we usually call as overbought conditions for an uptrend and
oversold conditions for a downtrend.

The best place to take advantage of the buy and sells are just after the first (1 st)
reject areas. The second (2nd) reject carry risk if we continue to trade in that
direction. However the third (3rd) and fourth (4th) reject carries the highest risk if we
continue trading to the direction.

For detect where the price will find support and resistance, do use the basic
understanding on price support and resistance. When you understand support and
resistance, you can never go wrong, as price action is the basis of all trading. It
triumph over all indicators.

Conclusion:
The sharing above is about understanding moving averages and its habit. Via the
habits, you get a clear picture of the chart. When the chart tells you stories, this is
where you start to identify the financial instrument movement in a clearer manner.
What I presented is not the final one. There are more and one has to understand
what was presented here to understand the next level. In the end price action trumps
all.