Part 2- No Nonsense Forex Newcomer Starter Guide

Now that you understand the overview of the task at hand, lets understand the algorithm outlined below:

  1. ATR (Average True Range)
  2. Baseline
  3. Primary Confirmation Indicator
  4. Volume Indicator
  5. Secondary Confirmation Indicator
  6. Exit Indicator

Although this is the order it is initially taught I believe the back testing and explanation of each piece of the algorithm should be in this order – I believe this method allows you to add each indicator to your algorithm system, one at a time, and each additional indicator should provide better results as you add them mostly by reducing the amount of losses you incur.

  1. ATR (Average True Range)
  2. Primary Confirmation Indicator
  3. Secondary Indicator
  4. Baseline
  5. Exit Indicator
  6. Volume Indicator

The first part of the algorithm is called the ATR (Average True Range). It is available on every MT4 software preinstalled. When you load the software onto your PC laptop or desktop it has a default period range of 14.

The ATR indicator is used to calculate your take profit (1 ATR) and your stop loss (1.5ATR). This indicator is robust because it can be used not only in forex but also oils, metals and indices. It calculates the price volatility (amount of pips) from the previous 14 periods (default setting) and gives you the average range of those candle bars on your screen.

The ATR indicator’s purpose is for money management by calculating how much risk you will place on each currency pair or financial product by using a total 2% risk in pip value using the ATR reading.

Here is a video tutorial where I explain how to do this easily.

Parts 2 & 3 are called the primary and secondary confirmation indicators. These indicators decide when you are going to enter the trade. They can also signal to exit a trade as well but we want to try to find a separate indicator specific to exiting a trade.

An example of these indicators can be found in the top 100 indicators where all of the pre- screened indicators are filed by each piece of the algorithm.

The purpose of the primary and secondary indicator is to get you into a trend when it begins and filters out price action which is only market noise and not a market in a trend. You are essentially trying to find an indicator with a balance between signaling quickly or strictly.

If you choose an indicator that signals to enter all the time you are never going to miss the start of a trend but you will also be entering into trades that are just market fluctuations and not going to trend at all.

If you choose an indicator that signals a little more strictly before signaling to enter into a trade you are going to miss the trade all together or get into the trend late and miss out on a lot of pips that could have been earned.

By having a primary and a secondary indicator it is best to find an indicator with a different personality. One could be quick to signal and one could be a little stricter but because they are working together you don’t want to match a pair of indicators that don’t work well together. They have to share some sort of commonality for the task at hand and remember the task at hand is getting into a trend.

Here is a video explaining the primary and secondary indicators working together and placing a trade with them.

Continued in Part 3