THE

SIMPLE PIPS GENERATING

MACHINE

SECOND EDITION
By
EKONYE G. KINGX
d_analyst
www.loooopfx.blogspot.com

1
INTRODUCTION

The Foreign Exchange market ‘FOREX’ as it is popularly called no doubt is the largest
Financial market in the world today with transactions worth several trillions of US dollars
Exchanging hands on a daily basis.
Trading forex might be a highly profitable business venture but I must say this; its not a
Get-rich-quick Avenue that any Tom, Dick and Harry could just jump into and hope to
become a millionaire overnight…it requires a lot of hard work, discipline and patience as
well as a touch of sound money management practice for one to be able to see the bright
side of Forex at least consistently. I am just a little over 3 years in trading forex however
and most unfortunately too, I spent a greater part of those 3 years in a fruitless search for
the ‘Holy Grail’ the one I will love to call ‘Traders Paradise’ a paradise where price
moves in a straight line (no swings), a paradise where every opened position ends in
profit…hmmm…very funny isn’t it? It took the latter part of my trading career to finally
realize the truth about trading forex profitably…believe it or not, ‘the most profitable
trading systems applied in forex are the simplest that ever existed’
A good and profitable trading system in my own view should have at least the following
Characteristics;

1. Simple
2. Trend following
3. Consistent and
4. Applicable to all pairs

The Simple Pips Generating Machine is a very simple trading system, it is trend
following, it has potentials for high level consistency in results and can be applied to all
instruments traded online be it currencies, commodities, cfds, indexes, stocks etc. As long
as the instrument’s price action can be represented on a candlesticks chart, then of course
you can apply my system to trading the instrument.

The Simple Pips Generating Machine was first published on the internet in August
2009. I uploaded the manual in major online trading and discussion forums like
forexfactory, sent copies to every online currency trader I know. All these I did for
free so that the system can be tested at least for confirmation of its simplicity and
potency however, after series of forward testing by all those who got a copy of the
manual, lot of comments were posted, lots of questions were asked and lots of
suggestions were prescribed too. I want to use this medium to acknowledge receipt of
all comments, questions and suggestions sent directly to me through my contact and
of course those posted on the various discussion forums I uploaded the document on
and I hereby from the very bottom of my heart say a very big thank you to everyone
concerned for all contributions made towards perfecting this simple trading system.

No doubt a lot of traders will agree that the system is truly very simple as said and
with huge profits potentials if the rules are carefully followed. I must confess that I
learnt so much from all comments, questions and suggestions I got from the forums,
you guys have truly inspired me the more to go back to the drawing board and came
up with a revised edition of the Simple Pips Generating Machine and in this edition, I
hope to provide detailed explanations on how effective the system can be applied and
I also hope to answer all questions asked to the very best of my understanding of your
respective questions asked. More detailed chart examples will be displayed here too
and I will try my best possible to leave no stone unturned.

2
Responses from 1st Edition

From all the response I got put together when I had the first edition published, I
figured out that so many persons had problems with the following;

1. Right buy/sell entry rules

2. Right exit points
3. Best time frame to apply system to
4. Best currency pair to trade with system
5. How to figure out valid signals from false signals and many others.

Walk with me and together let’s see how best we can offer possible and lasting
solutions to these problems…

…lets get down to business shall we? Of course yes…let’s go there!

SIMPLE PIPS GENERATING MACHINE

A lot of persons suggested adding one or two indicators to the setup to help reduced
risks of taking false signals however, I do not have a problem with that but in my own
sincere opinion, the system is better off left the way it is just as simple and as clear as
it is and if the rules are followed carefully, I promise you less problems trading the
system. I emphasised in the first edition, the need to add knowledge of trendlines,
support, resistance as well as price channels for high potency rate of the system, I
have tried it and I got incredible results and we shall be doing just that in this second
edition.

SETUP:

Now let’s set our chart up with the required tools.

TIME FRAME: 30mins, 1hr, 4hrs, daily, weekly and monthly

PAIRS: Currencies, cfds, commodities and indexes
INDICATORS:
1. SMA 5 (simple moving average set to period 5 applied to ‘close’ price)
2. SMA 20 (simple moving average set to period 20 applied to ‘close’ price)
3. MACD (set at default settings)

Your chart should look like the one below however, you have the liberty of setting
indicator colours to your own desired choice colour as for me, I like setting sma5 to
colour BLUE, sma20 to colour RED, macd histograms to colour BLUE and lastly, the
macd signal line to colour RED. One more thing, I love having my charts in plain
form without the grid lines also a friend suggested using chart examples with white
background and candlesticks in black (bear) and white (bull) so am going to do just
that.

3
Chart-1

The chart above is exactly how I expect your chart to look though colour may differ
but it doesn’t matter what matters is that you have your sma5 (close), sma20 (close)
and MACD (default) all uploaded and you are sure fully armed to the teeth for pips
hunting.

WHY THE COMBINATION OF SMA5, SMA20 AND MACD?

Good question if you ask me. Moving averages have been seen as very good trend
following indicators and am very sure that many traders can testify to that and among
the full pack of moving average types there is, a lot of traders including myself prefer
to use simple moving averages (SMA) though slower to react to price action, it has
been tested and proven by many to be smoother and produce more reliable buy/sell
signals when different periods are combined for instance sma5 (period 5) and sma20
(period 20). The sma5 in terms of periodicity is swifter to react to price action
compared to sma20 which is far much slower so the big question…how do we take
advantage of the fast response of sma5 and the sluggish response of sma20 to price
action respectively? The answer is not far fetched…we simply trade their crosses.
Now here is the deal, the two MAs are both trend following and as such when sma5
crosses above sma20 it suggest that price is likely to trade above sma20 for a while or
until sma5 crosses back below sma20 the same case applies to when sma5 crosses
below sma20.

See screen shots below.

4
Chart-2

Nice smooth crosses if you ask me…so beautiful…but I must point out the bitter truth
and am very sure 99.99% of you guys reading this will definitely agree with me that it
is not always as smooth as this more especially under real-time market conditions, it
is not easy to tell which cross will last and which won’t. Let’s take some examples of
such scenarios.

Chart-3

5
Hmmm…quite some very bad irregular crosses of sma5 and sma20 we have there on
the chart displayed above and that I tell you believe it or not are five consecutive
loosing trade setups and surely no one including myself would like to experience such
trades.

Let’s see some more examples of such unproductive trade setups of sma5 crossing
over sma20 too frequently within very short space of time.

Chart-4

Those are yet other good examples of such bad unfavourable crosses of sma5 and
sma20 and worst still, you could have even more than five bad setups in a row…very
possible.

There is also the issue of late signals due to waiting for sma5 to cross over sma20
suggesting a change of trend and this can lead to late entry while waiting to set an
entry after a convincing divergence between sma5 and sma20, this of course is what I
would love to term as ‘jumping into a moving bus’. It is very possible you get badly
hurt and not only that you may be faced with the problem of where to set your stop
loss and even when you are able to spot a good point to set your stop loss, it might
just be way too far away from your entry and should such stop loss gets triggered the
loss may not be one you could accommodate so easily.

Let’s see some good examples of what I am trying to point out.

6
Chart-5

The chart example above is a very good case of taking an entry way too late into the
move as a result of waiting for a clear cross of sma5 over sma20 and at a reasonable
divergence between the two. By my calculation, that entry will be about 200pips into
the move and if you ask me that is a lot of pips to waste in the name of waiting for
clearer coast.

Let’s see one more example.

Chart-6

7
As you can see in the chart example above, possible safe entry after cross of sma5 and
sma20 availed itself way into the move and this particular one came after about
160pips into the move…another late entry with possibility of very wide stop loss.

Do not get me wrong, I am not saying this late entries may not end profitably the
point am stressing here is the risk involved due to very wide stop loss level.

We have seen from a few examples above on how sma5 and sma20 crosses could
produce very good buy/sell signals however, we also saw that there seem to be a few
challenges that comes with those buy/sell signals…we have issues of possible rather
late entries and of course possibility of very wide stop loss levels. It really won’t
make much sense take for example an intraday trader taking trades off 4hr charts and
targeting about 100pips and then risking a very l-a-r-g-e 160pips all in the name of
stop loss. Doesn’t look good to me and am sure it doesn’t to you either.

To help remedy the ugly situation, let’s introduce the third and last member of the
gang that forms the simple pips generating machine…MACD.

Let us first of all study the characteristics of signals provided by macd…yes let’s go
there!

REVERSAL SIGNS

The macd gives a reflection of early signs of reversal via the macd bars (histograms)
forming below the red signal line suggesting a downward reversal or sell signal and
when it forms above signal line, that shows signs of upward reversal or buy signal.
Such signals are fully confirmed when bars starts forming below macd 0.00 line level
for sell signals and above 0.00 line level for buy signals. The chart examples below
explain more.

Chart-7

8
Chart-8

CONTINUATION SIGNS

Macd can also give early warning of continuation of previous trend after showing
reversal signs. For example, after giving a buy signal it is expected that the macd bars
continues to form above the red signal line and each successive bar formed shorter
than previous bar until it starts forming above 0.00 mark of macd however, when a
new bar forms and appear to be longer than a previous bar, that’s a warning sign and
if it continues till a bar forms back below the signal line then it is clear that previous
trend (downtrend) might continue. The chart below explains this more.

9
Chart-9

There are also times when signs of continuation of downtrend may not come so clear
in the form explained above rather you see series of bars formed like a sort of flat
bottom or broad bottom formation and before you know it a bar takes you by surprise
by growing straight back below the signal line. See example below.

Chart-10

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I am very sure lots of traders got caught up in that fish net shown above but not to
worry, that probably might be the last net you got caught in now that you know when
and how it comes.

We continue…yes o let’s go there!

Let’s see cases of continuation of previous trend after a downward reversal or a sell
signal shows on macd. In this case after giving a sell signal it is expected that the
macd bars continues to form below the red signal line and each successive bar formed
shorter than previous bar until it goes below 0.00 mark of macd however, when a new
bar forms and appear to be longer than a previous bar, that’s a warning sign and if it
continues till a bar forms back above the signal line then it is clear that previous trend
(uptrend) might continue. See chart-11.

There are also times when signs of continuation of an uptrend may not come so clear
in the form explained above rather you see series of bars formed like a sort of flat top
or broad top formation and before you know it a bar takes you by surprise by growing
straight back above the signal line and at a time like this, sincerely you don’t want to
hold on to hope. See chart-12.

Chart-11

11
Chart-12

Now having seen some of the characteristics of signals provided by MACD now let us
try to harmonise it with the sma5 and sma20 crosses and see how it could help us get
better entry points if we must trade the SMA crosses.

Now let’s take a very close look at the relationship between the three indicators on
the chart below let’s see if we can get any interesting finding or should I call it
revelation? Come with me.

Chart-13

12
Now tell me, did you observe anything? Hmmm…I urge you to look more closely
and tell me what you see. Ok ok ok …I will tell you what I see.

I found out something very interesting about the whole setup, whenever macd gives
its signals there is a subsequent cross of sma5 over sma20 and in the direction macd
signal is pointing and one very interesting thing about it all is that the macd signals
comes a lot more earlier before actual cross of sma5 over sma20 and so I thought
there could be a possibility of working some sort of magic on the period between
when macd gives signals and when sma5 crosses over sma20 in the direction macd
signalled.

Chart-14

I carefully started observing price action between when the MACD signal shows and
when actual SMA crosses takes effect and it didn’t take me very long to finally catch
what goes down within that period of time.

I found out that when macd gives a buy signal, price usually rises to hit sma20 and
followed by a bounce back which results to a close of candle below sma5 and this
close of candle below sma5 sometimes may not necessarily mean it has to be a one
candle affair, sometimes the close comes after two or three candles sometimes four
but soon after the close of the candle below sma5, there’s usually a sharp price rise
most times and closes above sma20 and that is when you start noticing sma5 crossing
sma20. Similarly, when macd gives a sell signal, price usually drops to sma20 then a
bounce is seen which results to a close above sma5 and just like that of buy signal, it
may sometimes take two to three candles after the bounce before an actual close of
13
candle above sma5 but soon after that close, a sharp drop of price is seen which
usually closes below sma20 and at that point, you start noticing sma5 crossing sma20.

Chart-14

Chart-15

14
There are times when there will be a bounce but no close of candle above or below
sma5.

Chart-16

Chart-17

15
There are also times when after a buy signal is seen on macd, price does rise but
doesn’t stop at sma20 it goes beyond sma20 and forms a new high and swing back
down to test sma20 and then continues to rise. Same thing happens sometimes also
when macd gives a sell signal, price drops to sma20 but doesn’t stop there it breaks
sma20 to form new low and then swings back up to test sma20 and then resumes the
drop. I discovered that this exception comes most times due to news release or some
fundamental events taking place same time.

Here are chart examples of the above explained exceptions;

Chart-18

Chart-19

16
Having made all these interesting findings, I ran a quick back test on so many pairs
and time frames and saw that the system is has this huge profit potential but I wasn’t
satisfied with just back testing so I went into forward testing for months and
eventually concluded within myself that the system is a true master piece.

Now to the entry rules…let’s go there!

SPGM ENTRY FOR LONG

Case-1

There MUST be a buy signal on macd then you MUST wait till price rises to hit
sma20 then you MUST wait further for a bounce back downwards and an eventual
close of a bear candle below sma5. The open of the new candle after the close below
sma5 should be your entry point for a long position.
Your stop loss MUST be placed at least 10pips below the most recent swing low.
Your exit target should be at any point of your choice between your entry and when
macd signals change of trend or gives a sell signal.

Chart-20

Note:
There are cases where the close below sma5 is close to the most recent swing low and
this affords one a tighter stop loss while there are some other cases whereby the close
below sma5 could be far above the most recent swing low and this could mean a wide
stop loss. Personally, I prefer setups that affords me tighter stop loss so you should
use your discretion in choice of setups to trade.

17
Chart-21

Chart-22

18
Case-2

This is a scenario where at point of macd signal for an uptrend or a buy, price already
broke through and closed above sma20 and ending up not producing a bounce off
sma20 and subsequent close below sma5 so in this case, you must wait for price to
swing back down to test sma20 (it usually does when there’s no bounce off sma20).
At the test of sma20, you may take a long position and set your exit at any point of
your choice between your entry and when macd signals change of trend. While your
stop loss should be at a safe distance of at least 30-50pips below sma20…sma20 apart
from being a trend indicator, it also doubles as a strong resistance/support line and
that is the more reason it has that unique bounce characteristics.

Chart-23

Note:
You may also wait to take your entry at the close of the candle that tested sma20
when price swings back down after breaking past sma20. Sometimes when price
swings back down to sma20 it ends up closing below sma20 but you should watch
macd closely if the buy signal is still in tact, you may still long otherwise, stay out.

Case-3

This is where after macd showed a buy signal, priced rose to hit sma20 and there
came a bounce off sma20 but no close below sma5 before rising past above sma20.
You may treat this case like CASE-2 above or apply some discretion in handling the
situation as long as macd signal is still intact.

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SPGM ENTRY FOR SHORT
Case-1

There MUST be a SELL signal on macd then you MUST wait till price drops to hit
sma20 then you MUST wait further for a bounce back upwards and an eventual close
of a bull candle above sma5. The open of the new candle after the close above sma5
should be your entry point for a short position.
Your stop loss MUST be placed at least 10pips above the most recent swing high.
Your exit target should be at any point of your choice between your entry and when
macd signals change of trend or gives a buy signal.

Chart-24

Note:
There are cases where the close above sma5 is close to the most recent swing high and
this affords one a tighter stop loss while there are some other cases whereby the close
above sma5 could be far below the most recent swing high and this could mean a
wide stop loss. Personally, I prefer setups that affords me tighter stop loss so you
should use your discretion in choice of setups to trade.

20
Chart-25

Chart-26

21
Case-2

This is a scenario where at point of macd signal for an downtrend or a sell, price
already broke through and closed below sma20 and ending up not producing a bounce
off sma20 and subsequent close above sma5 so in this case, you must wait for price to
swing back up to test sma20 (it usually does when there’s no bounce off sma20). At
the test of sma20, you may take a short position and set your exit at any point of your
choice between your entry and when macd signals change of trend. While your stop
loss should be at a safe distance of at least 30-50pips above sma20…sma20 apart
from being a trend indicator, it also doubles as a strong resistance/support line and
that is the more reason it has that unique bounce characteristics.

Chart-27

Note:
You may also wait to take your entry at the close of the candle that tested sma20
when price swings back up after breaking past sma20. Sometimes when price swings
back up to sma20 it ends up closing above sma20 but you should watch macd closely
if the sell signal is still in tact, you may still short otherwise, stay out.

Case-3

This is where after macd showed a sell signal, priced dropped to hit sma20 and there
came a bounce off sma20 but no close above sma5 before dropping past below
sma20. You may treat this case like CASE-2 above or apply some discretion in
handling the situation as long as macd signal is still intact.
22
PRICE ACTION AFTER SMA5 CROSSES OVER SMA20

We have gone through numerous pages trying to figure out the unique characteristics
of price action just after macd signals a buy or sell and right before sma5 crosses over
sma20 and so far we were able to make very interesting findings which are bound to
lead to highly profitable results if the rules are carefully and well adhered to.

Now we have seen what may likely occur just before sma5 crosses over sma20
…what about after the cross over? A friend asked me this question and I was in a
good position to provide a verifiable answer. What he actually wishes to know as at
then was the characteristics of price action after there had been a cross of sma5 over
sma20.

SMA20 apart from being a good trend indicator, it also posses some good energy that
makes it pass for a strong resistance/support line and when sma5 crosses over sma20
that line (sma20) gets broken and price trends afterwards above or below sma20 with
respect to direction of cross of sma5 over sma20. After a cross of SMA5 over
SMA20, a new swing high/low is achieved, except the macd signal is false or
catalysed by some sort of news release or fundamental event which requires
corrective moves, First touch of SMA20 after sma5 crosses over sma20 MOST
OFTEN RESULTS TO BOUNCE BACK surpassing the previous high/low achieved.
The bounce usually completes a nice 1-2-3 formation pattern.

Interesting isn’t it? I guess it is …now let’s go there!

Chart-28

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Chart-29

Chart-30

24
The point am trying to make clear here is that someone anyone might be unfortunate
to meet a trend initiated by macd signal when it has already taken off, nothing to
worry about…rather than jumping in we could wait for that first touch after sma
crosses and take it to probably the recent high/low achieved. As for those who were
able to take the first entry then the first touch bounce would be an opportunity to lock
in profits and add more lots however, if you miss both then stay off the market.
Brotherly advice!

Let’s now treat some questions,

What time frame is safest to take trades?

All time frames are safe to apply the system on. But you have to trade the direction of
the major or bigger trend by at least checking to make sure the next higher time frame
after your favourite is in line with the direction you are anticipating based on setups
on your time frame. For instance if you wish to trade a buy setup on 1hour chart,
make sure macd on 4hr chart is on buy mode. If you trade 15mins see 30mins, if you
trade 30mins see 1hr, 4hr should see daily, daily to weekly and weekly to monthly.
There must be consistency for you to dare into the market. I always check all the time
frames of my favourite pairs and it pays if you do same.

Does the system work on all pairs or just a specific number of pairs?

It’s a simple system and it is trend following and I believe all pairs move in trend so
the system should work on all pairs…yes it does work on all pairs.

What about exit targets…must I wait for a reversal signal?

Well the choice is yours. I personally do not wait for reversal signals to exit, I trade
30mins, 1hr and 4hr charts and my targets are fixed. 30mins chart I target 25pips, 1hr
charts I target 40pips and 4hr charts I go for 100pips. You may also use
support/resistance, trendlines and channels as guide to setting your exit targets.

What market trading session work best with system?

For 1hr and less, London and New York session provides more setups while 4hr and
above works good with all session.

Since the system works this good, what percentage of my equity can I risk?

Risk not more than 1.5% of equity.

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SPGM WITH TRENDLINES, CHANNELS, SUPPORT AND RESISTANCE

This part of this book is targeted towards impacting a fair basic knowledge of support,
resistance, trendlines and channels into young traders who for some weird reasons do
not bother about or have not been applying them on their charts. Trust me on this, if
these tools are applied along side the SPGM, greater results are bound to be achieved.

I will try my best to make my explanations to be as simple as possible for clearer

understanding however, I will still recommend you seek other good forex books on
technical analysis for more and deeper knowledge on how best to apply those tools.

Support, resistance, trendlines and channels play a key role as regards taking
discretional decisions based on entry and exits while trading setups provided by the
simple pips generating machine. Price action near those lines is always reflected on
the SPGM.

SUPPORT AND RESISTANCE

Support and resistance represent key junctures where the forces of supply and demand
meet. In the financial markets, prices are driven by excessive supply (down) and
demand (up). Supply is synonymous with bearish, bears and selling. Demand is
synonymous with bullish, bulls and buying. These terms are used interchangeably
throughout this and other articles. As demand increases, prices advance and as supply
increases, prices decline. When supply and demand are equal, prices move sideways
as bulls and bears slug it out for control.

What is support?

Support is the price level at which demand is thought to be strong enough to prevent
the price from declining further. The logic dictates that as the price declines towards
support and gets cheaper, buyers become more inclined to buy and sellers become less
inclined to sell. By the time the price reaches the support level, it is believed that
demand will overcome supply and prevent the price from falling below support.

Support does not always hold and a break below support signals that the bears have
won out over the bulls. A decline below support indicates a new willingness to sell
and/or a lack of incentive to buy. Support breaks and new lows signal that sellers have
reduced their expectations and are willing to sell at even lower prices. In addition,
buyers could not be coerced into buying until prices declined below support or below
the previous low. Once support is broken, another support level will have to be
established at a lower level.

26
Chart-31

Where is support established?

Support levels are usually below the current price, but it is not uncommon for a
security to trade at or near support. Technical analysis is not an exact science and it is
sometimes difficult to set exact support levels. In addition, price movements can be
volatile and dip below support briefly. Sometimes it does not seem logical to consider
a support level broken if the price closes 1/8 below the established support level. For
this reason, some traders and investors establish support zone. Support can be
established with the previous reaction lows.

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Chart-32

What is resistance?

Resistance is the price level at which selling is thought to be strong enough to prevent
the price from rising further. The logic dictates that as the price advances towards
resistance, sellers become more inclined to sell and buyers become less inclined to
buy. By the time the price reaches the resistance level, it is believed that supply will
overcome demand and prevent the price from rising above resistance.

Chart-33

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Resistance does not always hold and a break above resistance signals that the bulls
have won out over the bears. A break above resistance shows a new willingness to
buy and/or a lack of incentive to sell. Resistance breaks and new highs indicate buyers
have increased their expectations and are willing to buy at even higher prices. In
addition, sellers could not be coerced into selling until prices rose above resistance or
above the previous high. Once resistance is broken, another resistance level will have
to be established at a higher level.

Where is resistance established?

Resistance levels are usually above the current price, but it is not uncommon for a
security to trade at or near resistance. In addition, price movements can be volatile
and rise above resistance briefly. Sometimes it does not seem logical to consider a
resistance level broken if the price closes 1/8 above the established resistance level.
For this reason, some traders and investors establish resistance zones. Resistance can
be established by using the previous reaction highs.

Chart-34

Support equals resistance

Another principle of technical analysis stipulates that support can turn into resistance
and visa versa. Once the price breaks below a support level, the broken support level
can turn into resistance. The break of support signals that the forces of supply have
overcome the forces of demand. Therefore, if the price returns to this level, there is
likely to be an increase in supply, and hence resistance.

The other turn of the coin is resistance turning into support. As the price advances
above resistance, it signals changes in supply and demand. The breakout above
resistance proves that the forces of demand have overwhelmed the forces of supply. If
the price returns to this level, there is likely to be an increase in demand and support
will be found.

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Chart-35

Summary

Identification of key support and resistance levels is an essential ingredient to

successful technical analysis. Even though it is sometimes difficult to establish exact
support and resistance levels, being aware of their existence and location can greatly
enhance analysis and forecasting abilities. If a security is approaching an important
support level, it can serve as an alert to be extra vigilant in looking for signs of
increased buying pressure and a potential reversal. If a security is approaching a
resistance level, it can act as an alert to look for signs of increased selling pressure
and potential reversal. If a support or resistance level is broken, it signals that the
relationship between supply and demand has changed. A resistance breakout signals
that demand (bulls) has gained the upper hand and a support break signals that supply
(bears) has won the battle.

TRENDLINES

Technical analysis is built on the assumption that prices trend. Trend Lines are an
important tool in technical analysis for both trend identification and confirmation. A
trend line is a straight line that connects two or more price points and then extends
into the future to act as a line of support or resistance. Many of the principles
applicable to support and resistance levels can be applied to trend lines as well.

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Uptrend line

An uptrend line has a positive slope and is formed by connecting two or more low
points. The second low must be higher than the first for the line to have a positive
slope. Uptrend lines act as support and indicate that net-demand (demand less supply)
is increasing even as the price rises. A rising price combined with increasing demand
is very bullish, and shows a strong determination on the part of the buyers. As long as
prices remain above the trend line, the uptrend is considered solid and intact. A break
below the uptrend line indicates that net-demand has weakened and a change in trend
could be imminent.

Chart-36

Downtrend line

A downtrend line has a negative slope and is formed by connecting two or more high
points. The second high must be lower than the first for the line to have a negative
slope. Downtrend lines act as resistance, and indicate that net-supply (supply less
demand) is increasing even as the price declines. A declining price combined with
increasing supply is very bearish, and shows the strong resolve of the sellers. As long
as prices remain below the downtrend line, the downtrend is solid and intact. A break
above the downtrend line indicates that net-supply is decreasing and that a change of
trend could be imminent.

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Validation

It takes two or more points to draw a trend line the more points used to draw the trend
line, the more validity attached to the support or resistance level represented by the
trend line. It can sometimes be difficult to find more than 2 points from which to
construct a trend line Even though trend lines are an important aspect of technical
analysis, it is not always possible to draw trend lines on every price chart. Sometimes
the lows or highs just don't match up, and it is best not to force the issue. The general
rule in technical analysis is that it takes two points to draw a trend line and the third
point confirms the validity.

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Summary

Trend lines can offer great insight, but if used improperly, they can also produce false
signals. Other items - such as horizontal support and resistance levels or peak-and-
trough analysis - should be employed to validate trend line breaks. While trend lines
have become a very popular aspect of technical analysis, they are merely one tool for
establishing, analyzing, and confirming a trend. Trend lines should not be the final
arbiter, but should serve merely as a warning that a change in trend may be imminent.
By using trend line breaks for warnings, investors and traders can pay closer attention
to other confirming signals for a potential change in trend.

CHANNELS

If we take this trend line theory one step further and draw a parallel line at the same
angle of the uptrend or downtrend, we will have created a channel.

Up or ascending channel

To create an up (ascending) channel, simply draw a parallel line at the same angle as
an uptrend line and then move that line to position where it touches the most recent
peak. This should be done at the same time you create the trend line.

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Chart-39

Down or descending channel

To create a down (descending) channel, simple draw a parallel line at the same angle
as the downtrend line and then move that line to a position where it touches the most
recent valley. This should be done at the same time you created the trend line.

Chart-40

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CONCLUSION

When prices hit support, an uptrend line or the lower channel this may be used as a
buying area. When prices hit resistance, a downtrend line or upper channel line this
may be used as a selling area. To apply this to the simple pips generating machine,
what you do is observe what macd says when price hit those points and if macd gives
a reversal signal then that signal most likely is going to last for a while.

You can also use the simple pips generating machine to determine when there is a
breakout either a break of resistance, support, trend line or channel. And how do you
read this on the macd? Good question. There are times when macd gives you a
reversal signal either up or down and not long after, macd bars goes back below or
above red signal line signalling a continuation of previous trend and a close above
resistance, downtrend line or upper channel line at that instance could mean a valid
break towards the upside. Similarly, a close below support, uptrend line or lower
channel line at that instance could mean a valid break towards the downside.

FINAL CALL

Finally, this is the point where I will like to wrap it all up. I have tried my best within
my capacity and even went extra miles just to be able to make this book as simple and
as explicit as possible for easy understanding. I hope I have been able to answer most
of the questions asked and I sincerely hope you guys will face lesser difficulties in
applying the system effectively now that it has even been broken down to smaller
piece for easy consumption.

One last tip:

When macd gives a buy/sell signal, it is safe to long/short to sma20 but you must use
your discretion for instance, you need consider how far up or low sma20 lies before
making an entry. You can use the cross-hair tool to measure…if the distance is less
than 30 pips then forget it. I have had 100pips before just trading to sma20 soon after
macd gives signal. Also, the bounce off sma20 can be traded till above or below sma5
but you have to apply high sense of discretion in doing this because there are some
sma20 bounce that doesn’t gets to sma5, some leads to a close above/below sma5,
some leads to a continuation and there are some others that don’t do bounce at
all…use your discretion!

Follow the rules and you shall be successful.

Good luck to you all.

d_analyst

Trading Futures and Options on Futures and Cash Forex transactions involves substantial
Risk of loss and may not be suitable for all investors. You should carefully consider whether trading is suitable for you
in light of your circumstances, knowledge, and financial resources. You may lose all or more of your initial investment.
Opinions, market data, and recommendations are subject to change at any time.

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