forex

Director
Filtering Ultra Blue Trades For
Better results

By Russ Horn
Forex Masonry
 Forex Director
High Risk Investment
TRADING FOREIGN EXCHANGE ON MARGIN CARRIES A
HIGH LEVEL OF RISK, AND MAY NOT BE SUITABLE FOR
ALL INVESTORS.
Before deciding to trade foreign exchange, you should carefully consider your
investment objectives, level of experience, and risk appetite. The possibility
exists that you could sustain a loss of some, or all, of your initial investment,
and therefore you should not invest money that you cannot afford to lose. You
should be aware of all the risks associated with foreign exchange trading, and
seek advice from an independent financial adviser if you have any doubts.

RISK
AHEAD
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 Forex Director

Introduction
The Forex Director is more Just a reliable filter
The Forex Director is a plug-n-play addition to the Ultra Blue systems. We can
add this indicator to the existing template, and from there we will look at the
market through new eyes.

The Forex Director is designed to reduce the trades you take in the wrong
direction.

With the Forex Director added yo your Ultra Blue system, you will reduce the
number of losing trades, but at the same time, it will provide a trading signal
that might not otherwise have been seen before.

As you know, the market moves in a zig zag pattern, but it does this with a
prevailing trend.

The market moves farther in the trending direction than against the trending
direction. This isn't new information, it's a long established fact you can see on
any chart you look at.

When the market moves with the trend in this zig zag pattern, the Director will
identify the pullback direction and keep you from trading in that direction.

As we go, you will see how useful and powerful the Forex Director really is.

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 Forex Director

Trend Direction
Using the 13 EMA and the 34 EMA
We identifying the trend direction using the 13 EMA and the 34 EMA. These
moving averages are the backbone to the Ultra Blue Forex trading systems.
Our trades are based on the direction of the trend, and this includes anything
counter-trend. Once we know the direction of the trend, we can make the
appropriate trading decisions.

Identifying the Short-Term Trend

These moving averages paired together will determine the short-term trend.
When the 13 EMA is above the 34 EMA, the trend is up.
When the 13 EMA is below the 34 EMA, the trend is down.

DOWNTREND:
13 EMA below
the 34 EMA

UPTREND:
13 EMA above
the 34 EMA

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 Forex Director
The market moves mostly with the trend
We want to trade with the trend for the simple fact the market moves farther
and more consistently in the trending direction.

The market moves in waves.

The big move in the trend direction is the impulse move.
The smaller move against the trend is the correction (or the pullback).

Impulse
Impulse

Impulse

Impulse

Correction
Correction

Correction

Correction

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 Forex Director
Sometimes the correction fakes us out
The correctional phase of the market can sometimes be large enough to
change the indicators to show us that the trend has changed direction.

This makes trading the new trend direction unprofitable. The overall trend
direction hasn't changed, the longer term trend is still intact, but the short-term
13 and 34 EMAs have been influenced into thinking the trend direction has
changed.

The market needs to move quite a ways in order to change the short-term
trend, but even so, this move is just a bigger correction and not a change in the
direction of the trend.

In the image below, the trend is down. The middle of the chart shows us a
correction large enough to change the direction of the moving averages, but
attempting to trade this direction would be a struggle. After the pullback is
finished, the downward trend direction resumes.

Correction big enough

to change the direction
of the short term trend

Downtrend
Downtrend
resumes

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The Director
Adding the 136 EMA
To get around the false changes in trend direction the short-term trend can
sometimes show us, we will add the 136 EMA to the charts.

1. Click: Insert
2. Hover over: Indicators
3. Hover over: Trend
4. Click: Moving Average

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 Forex Director
We will make the changes to the moving average properties box to reflect the
image shown below.

Under the
Parameters tab:

Period: 136
Shift: 1
MA Method: Exponential
Apply to: Close
Style: 17,87,193
Chose Line Thickness:
Mine is the thinnest and the
dashed
Click: OK
Dashed Thinnest

What we will end up with is a chart that has a moving average the looks like
the image below. (The image shows off the moving averages, it is missing the
RSI and the OSMA simply for the purpose of the examples.)

136 EMA

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 Forex Director

Long-Term trend
Using the 34 EmA and the 136 EMA
Now that we have added the 136 EMA to the charts, we can identify the
longer-term trend.

Trends are relative to each other, and since we have the 13/34 combination
reacting quicker to market moves, they would be the short-term trend.

The combination of the 34 and the 136 now would be the long-term trend.

136 EMA

34 EMA

LONG-TERM TREND IS DOWN

34 EMA remains under the 136 EMA

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 Forex Director
No matter what the 13 EMA is doing, the long-term trend is decided by the the
side of the 136 EMA the 34 EMA is on.
Uptrend when the 34 EM is above the 136 EMA
Downtrend when the 34 EMA is below the 136 EMA

Uptrend:

Long-term uptrend starts

when the 34 EMA crosses
above the 136 EMA

Downtrend:

Long-term downtrend
starts when the 34
EMA crosses below
the 136 EMA

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 Forex Director

Trend Phases
The order of the moving average are important.
We will be looking at the different phases of the market based on how the
moving averages are stacked. They can be in order or out of order, and the
phase the market is in will dictate how we trade (or don't trade).

We use 3 different moving averages now that the 136 EMA is added to the
system:
13 EMA (red solid line)
34 EMA (blue solid line)
136 EMA (blue dashed line)

34 EMA
136 EMA

13 EMA

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 Forex Director
PHASE #1
Ordered Moving Averages
The ordered phase of the market is the one that we will actively be trading.
The ordered phase is the trending phase of the market.

The ordered phase of the market shows us the short term trend and the long
term trend are moving in the same direction.

Uptrend:
The short-term trend is up.
The long-term trend is up.

The moving averages from top to bottom:

13 EMA
34 EMA
136 EMA

Downtrend:
The short-term trend is down.
The long-term trend is down.

The moving averages from top to bottom:

136 EMA
34 EMA
13 EMA

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 Forex Director
Ordered Moving Averages - uptrend
Generally, as a new trend starts, the short term EMAs will order themselves
fisrt followed by the long term EMAs as in the examples below.

Long-term trend
Short-term trend turns up when
turns up when 34 EMA crosses
13 EMA crosses above 136 EMA
above 34 EMA

Uptrend

Below is an example of how the long-term trend is in order then the short-term
trend follows after.

Short-term trend turns

up when 13 EMA
crosses above 34 EMA

Uptrend
Uptrend

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 Forex Director
Ordered Moving Averages - downtrend
Generally, as a new trend starts, the short-term EMAs will order themselves
first, followed by the long-term EMAs as in the examples below.

Long-term trend turns

down when 34 EMA
crosses below 136 EMA

Short-term trend
turns down when
13 EMA crosses
below 34 EMA Downtrend

Below is an example of how the long-term trend is in order then the short-term
trend follows after.

Downtrend

Short-term trend turns down when

13 EMA crosses below 34 EMA

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 Forex Director
PHASE #2
unOrdered Moving Averages
The unordered market phase is when the moving averages are in any order
that is not either ascending or descending.

The unordered moving averages are transitional phases.

These are the phases the market needs to go through when the trending
phases change direction.

When a market starts in a trend direction, it will go through 2 unordered phases

as it changes to the other trend direction:

Transition from a Transition from an

downtrend to an uptrend to a
uptrend downtrend
Unordered Part 1: Unordered Part 1:
136 EMA 34 EMA
13 EMA 13 EMA
34 EMA 136 EMA

Unordered Part 2: Unordered Part 2:

13 EMA 34 EMA
136 EMA 136 EMA
34 EMA 13 EMA

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 Forex Director
Transitioning to an uptrend
There are two parts to the trend transition.
Part 1 is when the 13 EMA crosses above the 34 EMA.
Part 2 is when the 13 EMA crosses above the 136 EMA.

Transition from a
downtrend to an
uptrend
Unordered Part 1: Unordered part 2:
136 EMA 13 EMA
13 EMA 136 EMA
34 EMA 34 EMA

The pink square in the image is part 1 when the 13 EMA crosses above the 34
EMA.
The green square is part 2 is when the 13 EMA crosses above the 136 EMA.
When the 34 EMA crosses above the 136 EMA, we are officially trending up.

Part 1 Part 2

13 EMA
crosses above Official
34 EMA uptrend

13 EMA crosses
above 136 EMA

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 Forex Director
Transitioning to a Downtrend
There are two parts to the trend transition.
Part 1 is when the 13 EMA crosses below the 34 EMA.
Part 2 is when the 13 EMA crosses below the 136 EMA.

Transition from an
uptrend to a
downtrend
Unordered Part 1: Unordered part 2:
34 EMA 34 EMA
13 EMA 136 EMA
136 EMA 13 EMA

The pink square in the image is part 1 when the 13 EMA crosses below the 34
EMA.
The green square is part 2 is when the 13 EMA crosses below the 136 EMA.
When the 34 crosses below the 136, we are officially trending down.

Part 2
Official
downtrend

13 EMA
crosses below
34 EMA

13 EMA crosses
Part 1
above 136 EMA

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 Forex Director
Part 1 - no trading
During part 1 of the unordered phase when the 13 EMA is in between the 34
and the 136 EMAs, there is no trading.

The short-term trend and the long-term trend are in disagreement and they will
fight each other, usually resulting in very little market movement.

Trading in part 1 of the unordered phase doesn't always mean there is a trend
reversal on the way, it can simply be a correction or a flat market. The trend
can easily resume after part 1 without ever getting to part 2.

In the image below, there is a section of the chart that enters part 1 of the
unordered phase. We don't know if part 1 will continue into part 2 or change
back into the trend direction and become the ordered phase again.

All we want to keep in mind is when the market is in part 1 of the unordered
phase, there is no trading. The market is bullish as the long-term trend is up
but the short-term trend is down.

No trading
zone

13 EMA
under 34 EMA
136 EMA

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 Forex Director
Part 1 - no trading
This is part 1 of the unordered phase in a bearish market. The long term trend
is down, but the short term trend turns up.

Below is an example as the market follows though to a full trend reversal.

136 EMA

13 EMA No trading
above 34 EMA zone

Below is an example as the market makes a small correction then resumes in

the trending direction.

136 EMA
13 EMA
above 34 EMA

No trading
zone

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 Forex Director
Part 2 - Cautious trading
During part 2 of the unordered phase when the 136 EMA is in between the 13
and the 34 EMAs, we can trade, but we will do it with caution.

Part 2 of the unordered phase can often lead to the change in the market
direction, and in doing so, trades will often be successful.

It's important to remember that in part 2, the market is not committed to

changing the trend direction and it may turn back into the original trend
direction.

Below is a chart example of a bullish market in the unordered phase as it

reaches part 2. In this case, the unordered phase part 2 continues to move and
change the trend direction.

The part 2 section of the unordered phase is tradable, but can be risky.

Trade with
caution

136 EMA

13 EMA
under 136 EMA

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 Forex Director
Part 2 - Cautious trading
In the example below, the market is transitioning to a new trend direction. part
2 of the unordered phase leads into the new trend. This is ok to trade, but
again, trade with caution.

Trade with
13 EMA caution
above 136 EMA

136 EMA

Below is a market that enters part 2 of the unordered phase only to go back to
the untrable part 1.

Market re-enters part 1

Part 2 of the unordered phase

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Director's Cut
The Market moves back to the 136 EMA
There is an interesting move the market makes once the short-term trend
changes direction.

When we have an ordered phase, all the moving averages are in order, then
the short-term trend changes direction (part 1 of the unordered phase), the
price will try to make its way to the 136 EMA.

The price will want to touch the 136 EMA as some kind of reassurance before
it continues doing whatever it's going to do. Once the short-term trend turns
against the long-term trend, either the trend will resume or the price will
continue until a new trend takes over. In the middle of that, the price tries to
touch the 136 EMA regardless of what it will ultimately end up doing.

Short-term trend Part 1 of the

turns down unordered
phase

Price makes
Long-term its way to
trend is up the 136 EMA

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 Forex Director
Taking Advantage of the Director's Cut
Many times there isn't a lot of space to trade to the 136 EMA, but there is a
way we can take advantage of the move to the 136 EMA.

When we have part 1 of the unordered phase, we can move to the lower
timeframe to look for a trading opportunity towards the higher timeframe 136
EMA.

The first touch to the 136 EMA is usually out of our hands if there is no
pullback along the way, but following bounces or pullbacks can give us
opportunities.

This will require a little flipping from timeframe to timeframe once the trade is
placed, but it's not as bad as it sounds.

Once the trade is placed, we are looking for the price to touch the 136 of the
higher timeframe. The way I do this is by drawing a trendline to approximate
the position of the 136 EMA in the future.

First move to the 136 EMA never gave

us a chance to trade it.

We would wait for a pullback on the

lower timeframe. This will be a
perfectly tradable setup on the lower
timeframe, so we are simply waiting
for a trading opportunity.

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 Forex Director
The Bearish Director's Cut
The market on the higher timeframe (in this case the 4 hour) has just turned
bearish. The lower timeframe market (the 1 hour timeframe) wants to make its
way up to the 136 EMA.

Price hit
the 4 hour
136 EMA

The chart below is the move back to the 4 hour 136 EMA. The 136 is not going
to show on the lower timeframe in the right place, so we want to mark it off on
the higher timeframe .

Price hit
the 4 hour
136 EMA

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 Forex Director
The Bullish Director's Cut
I will do a walk-through of a trade and how I would go about it. I tend to draw
lines on my chart to represent the higher timeframe 136 EMA, and I will show
you the process I take.

Step 1.
On the higher timeframe, the bearish ordered phase turns into part 1 of the
unordered phase. The 13 EMA crosses above the 34 EMA.
Step 2.
Draw a trendline on the chart to best extrapolate the 136 EMA. This line will
show up in the right place on the lower timeframe.
Step 3.
Switch to the lower timeframe and look for a trading opportunity towards the
line you drew on the chart (the representation of the 136 EMA of the higher
timeframe).

It's important to note that during the trade, I will flip back and forth to the higher
timeframe and occasionally adjust the trendline target.

As the market progresses, the trendline you draw on the higher timeframe may
need to be re-fit to the 136 EMA as it moves and slightly changes its direction.
It's not a big deal at all, but it's something to be aware of if you want to get the
maximum from your trade.

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 Forex Director
The Bullish Director's Cut
Step numbers 1 and 2 on the higher timeframe:
1. 13 EMA crosses above the 34 EMA to have the short-term trend turn up.
2. Trendline is drawn to extrapolate the 136 EMA

HTF Draw trendline to

1 Hour timeframe extrapolate the 136 EMA

Short-term trend
crosses upward

3. look for a trading opportunity in the direction of the 136 EMA trendline of the
higher timeframe.

LTF Target the HTF 136

15 Minute timeframe EMA trendline

Looking for trading signal

on the lower timeframe to
place a trade

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 Forex Director
Director's Cut note
When looking for a trade on the lower timeframe, it's not important we have an
ordered phase in place. As long as the 13 EMA and the 34 EMA are in order
(the short-term trend), we can look to place a trade.

Unordered phase, but

the short-term trend in
bullish

A more conservative approach is to wait for the ordered phase to happen

before taking trades, but it's not necessary.

If you want to be more

conservative, you can
wait until the ordered
phase forms before
you take a trade.

Trade signals in
the ordered phase

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 Forex Director

Conclusion
More than just a filter
I always caution about adding too many filters to a trading system, but in the
case, it's a welcome addition.

The examples in the manual were discussed without the use of the RSI or the
OSMA indicators, and this was simply to get as much room for the chart
examples as possible. The other indicators will indeed be a part of the trading
systems you choose to use. A complete chart will look like this:

I hope you enjoyed the manual!

As always, best of luck to you, your loved ones, and your trading career!

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