Futures traders usually calculate and chart several moving averages of various time variations (5-day, 20-day, etc.) for use as indicators. Short-term moving averages are more sensitive to price change, but early signals may proof to be false. Long-term moving averages respond more slowly, but there is the danger of missing the trend by waiting too long. By comparing short, medium and long-term moving averages, futures traders can spot probable trend changes. The challenge is to determine the combination of time variations that will create that optimum balance that results in reliable indicators.

Watch your moving averages for these signals:

• When a faster average crosses above a slower average, buy.
• When a faster average crosses below a slower average, sell.
• When the daily close is below either moving average, offset long positions.
• When the daily closes is above either moving average, offset short positions.

One important caveat about using published moving averages for information or comparison: You cannot assume that the market will behave today the way it did yesterday!

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A simple moving average is the average of a series of closing prices over a set period of time. For example, to determine a 3-day moving average of a commodity, the closing prices for three consecutive days are added together and divided by 3. A 20-day moving average would add the closing prices for 20 days and divide by 20. The “moving” is created by re-adding and re-dividing each day. In recalculating, the earliest closing price is dropped and the newest closing price is added before the figures are averaged. In our example, you are always averaging 3 prices for the three most recent consecutive days; however, those days are progressing in time through the month; therefore, the average is “moving.”

Because they use information that has already taken place, moving averages are “lagging” indicators. They are also “trend following” indicators that are most useful in trending price patterns in which an uptrend or downtrend is firmly entrenched. Moving averages often serve as both support and resistance points.When graphed, horizontal, or “flatline” moving averages have no predictive value.

The most common moving averages, those touted on the financial networks are 20-, 40-, 50-, and 200-day averages. Also effective are 10-, 30- and 100-day averages. Some traders create their own moving averages at intervals that appeal to them: 12, 18, 21, etc. days. Determine the time periods you believe will be most effective and stick with them. As a rule of thumb, limit your charts to no more than 4 or 5 moving averages per chart to avoid confusion.

Day traders often use shorter moving averages based on Fibonacci numbers, such as 5, 8, 13, 21 or 34.  These moving averages, especially if they are exponential moving averages (EMAs) can be very effective on short time frames.

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The Tail

In charting, a tail indicates the occurrence of a shift in the balance of power between buyers and sellers. A topping tail shows sellers in control of the market. It points toward the period high and shows an initial upward move that quickly gives way to a downside drop. Conversely, a bottoming tail points toward the low and begins with a market drop that quickly reverses into an upturn. It indicates that buyers control the market.

What tails looks like:

• In a western bar chart, a bottoming tail shows a smidgen of bar above close-together arms with a long length of bar below. A topping tail shows just the opposite with the smidgen at the bottom and a long length of bar above the arms.
• In a candlestick chart, the real body (cylinder) is very short and squat, indicating a high and low nearly at the same point. In a bottoming tail, the body is dark or black with the tail above the body being extremely short and the one below, long and trailing. In a topping tail, the real body is white or light with a long tail above and a minute tail below the cylinder.

What tails tell futures traders:

• Tails indicate changes in control of the market, or shakeouts. A bottoming tail shows buyers in control while a topping tail shows sellers in ascendancy.
• Tails indicate where expert traders are quietly manipulating the market and where you might get in on the action. A topping tail shows where experts are dumping holdings; a bottoming tail, where they are accumulating.

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The Reversal Bar (RB)

In charting, a reversal bar shows an initial, often sharp, move in one direction, followed by an abrupt turn, ending the period in the opposite direction from which it started, and below the starting point. In a bull market, after an initial downturn, the reversal bar will turn upwards and close near the period’s high and above the opening price. In a bear market, the opposite is true. After an initial rally, the reversal bar will turn downwards and close near the period’s low and below the opening price.

What a reversal bar looks like: 

• In a western bar chart, the vertical bar is long with the protruding arms fairly close together. In a bull reversal, the arms will be at the top of the bar; in a bear reversal, at the bottom.
• In a candlestick chart, the real body (cylinder) is quite short and squat, nearly square, indicating a high and low that are nearly at the same point. In a bull reversal, the real body will be white or light and the top tail will be extremely short; the bottom tail, very long. In a bear reversal, the real body will be black or dark and the top tail will be long; the bottom tail, quite short.

What a reversal bar tells futures traders:

• A reversal bar indicates a market shakeout.
• A bull reversal bar indicates that market control has moved from sellers back to buyers; a bear reversal bar shows control shifting from buyers to sellers.
• A reversal bar predicts an imminent sharp turn in the market. It can also herald a coming change in the market trend.
• Market changes that follow a reversal bar are generally more potent and reliable.

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The Narrow-Range Bar (NRB)

In charting, a narrow-range bar is a bar with a smaller than normal range between the high and low. If you see a narrow-range bar on your charts, it indicates a dramatic decrease in market volatility and generally heralds a coming turn in the market. This is important to futures traders because strong moves often emerge from periods of low volatility. The sight of a narrow-range bar on your charts alerts futures traders that the winds of change are about to blow.

What a narrow-range bar looks like:

• In a western bar chart, the vertical bar is short and squatty, the protruding arms fairly close to each other.
• In a candlestick chart, the real body (cylinder) is so short it’s nearly square.

What a narrow-range bar tells futures traders:

• Buyers and sellers are nearly equal in power.
• Occurring after normal range bars, it indicates the imminent occurrence of a strong turn in the market. A market turn after the appearance of a NRB is generally more reliable.

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There are other charting techniques that provide futures traders with more information than candlesticks. Their allure lies in their ability to visually show traders which way the market is trending — bull or bear — and which way it is about to trend. Knowing which group controls the market — and, more importantly, which group is about to control the market — gives futures traders a significant trading advantage. Successful futures traders consistently trade with the market trend. Basically, in a bull market, you want to buy. You sell in a bear market. Knowing which way the market is going to trend allows you to enter and exit the market at the front of the pack where the profits are greatest.

The strictly vertical Japanese candlestick is simply easier to interpret at a glance than the armed column of the Western bar chart. Candlesticks emphasize the relationship between the opening and closing prices with a cylindrical body, called the real body. The top and bottom of the cylinder represent the open and close with the two wicks –one extending from the top, one from the bottom of the cylinder — indicating the extreme high and low prices of the period. It is the range between the opening and closing prices more than the prices themselves that tells a trader whether the bears or bulls are in control of the market. Candlestick charts make this instantly obvious.

The color of the cylinder also provides futures traders with immediate information about market movement. When the bulls are leading the market, the real body (cylinder) will be white. White is a light color, so think of it as also being light in weight, of rising upward. Therefore, any white or light-colored candlestick represents an uptrending, or bull, market that favors buyers. Conversely, when the bears lead the market, the real body will be black. Think of black as a dark, heavy, sinking color. Black or dark colored candlesticks represent a downtrending, or bear, market that favors sellers. A candlestick that looks like a Western bar with no real body, indicates a market that opened and closed at the same price. In other words, the bulls and bears fought to a tie.

Human physiology affects our ability to achieve the mental, physical and emotional control needed to succeed as a futures trader. Like primitive hunters, futures traders are competing in a hostile world that demands total concentration and lightening reflexes to survive. All the technology we use can make many of our tasks, like analysis and charting, easier and can increase our profitability as futures traders; but technology is just a tool. Ultimately, we must rely on our mind and our body to pull the trigger and make the trade.

The goal of the futures trader is to achieve the total synergy of mind and body called the Alpha Zone. You have entered the Alpha Zone when your mental, physical and emotional control is at its peak. When this happens you are trading “in the zone.”

While some traders utilize biofeedback techniques to help them learn to achieve this state, there are a number of common sense things you can do to get yourself in the zone.

• Listen to your biological clock. Humans are hard wired to hunt during the day and sleep at night. Over the centuries though the human clock has gotten shaken up a bit, so that today we don’t all reach our optimum operating peak at the same time of day. (We’ve all know people whose brains don’t seem to click on until noon, the “not a morning person” types.) Try to trade during the time of day when you know you’re at your best. You can help yourself by trading in a bright, well-lit area with, preferably, a fair amount of natural light. Light, particularly sunlight, makes us more alert.
• Tune up your body.  Trading is a sedentary occupation. Bodies at rest are easily fatigued. Jump-start your metabolism with an energizing walk or run early in the morning. During the day, relieve fatigue and stimulate your muscles with stretching or isometric exercises. Squeezing a small rubber ball helps some traders stay alert and focused.
•  Fuel your body. Don’t start your day with sugary foods. At first your blood sugar will spike and you’ll feel alert. But as your blood sugar drops during the day, you’ll feel increasingly fatigued and your performance will suffer. Some traders snack on energy bars mid-morning and afternoon to keep their bodies fueled. Make sure you check ingredients and avoid bars with high sugar contents. Sugary snacks will send you quickly careening from high alertness to dragging fatigue. Protein and complex carbohydrates will help you achieve and maintain alertness and concentration. However, beware of naturally sleep-inducing foods such as turkey, milk, bananas, fish and egg whites. Foods that can perk you up include coffee, tea, chocolate, soft drinks, and herbal teas. Be cautious about using caffeine to maintain alertness. It can send you on the same peak and valley ride as sugar, with increased caffeine needed to achieve the same level of alertness each time the previous dose wears off.
• Control your environment. Dry, cool air will help keep you alert and focused, as will bright light, particularly natural light. The smell of peppermint increases alertness. A spritz of mint in the air a couple of times between noon and 1 p.m. can help get you through the lunchtime doldrums. Dull, repetitive sounds like a computer or fluorescent light humming can be sleep-inducing. Sharp, irregular sounds like loud conversation or a radio can be distracting. A set of soft earplugs from your local drugstore can solve both problems, improving concentration.
• Recharge your batteries. Adequate sleep improves both performance and alertness. For your body to operate at peak efficiency, you must get enough sleep to enter the REM (rapid eye movement) cycle which promotes learning, creativity and imagination. This is also the most restful of the four sleep cycles and necessary to fully recharge your body’s battery.

“Each specified period (that is, day, hour, 15 minutes, 5 minutes, 1 minute) is nothing more than a battle or mini skirmish between the only two groups of players in existence: the buyers and the sellers, better known as the Bulls and the Bears,” Velez explains.

Daily charts chronicle the battles in an ongoing war as first one side wins, then the other, until one side finally emerges victorious. Each bar on a chart represents a single battle in the never-ending war that is the market. Successful futures traders develop the ability to determine which side is winning. By aligning their actions with those of the winning side, they make money.

However, Velez cautions, “While one group can be winning the current battle (period), the other group can be dominating the war (the trend).”

The art of chart reading and the hallmark of a master trader is the ability to “consistently spot the moment just before one group takes control of the other,” Velez says. It is at that moment that fortunes can be made.

There are reliable indicators and chart patterns that can help you pinpoint the precise moment when the balance of power will shift. In my Futures Trading Secrets Study Course I teach you how to spot and trade high profit chart patterns, how to interpret price action and predict the next bar. In a series of video tutorials on two CD ROMs, I show you everything you need to know to trade with actual trade signals explained in real time and with signal-by-signal analysis! Of the people who buy my system, 87% report dramatic increases in profitability (click the link to read what our students have to say).