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TECHNICAL ANALYSIS

Trade using Moving Average bounces

They are versatile, objective and can be used in many different ways. To some traders, moving averages are used to help confirm trend direction, while to others, they are either used to trail their stops or simply to measure momentum in the market. But just how can we make money from them?

The answer is reassuringly simple. In this article, I shall discuss a practical step by step process which you can immediately apply to moving averages in trending markets.  The logic behind it is fully universal and you can apply the following advice to any asset class you trade.

A key advantage to using moving averages is that they can offer objective clarity in a market cluttered with subjective observations. However, if use incorrectly, they can do nothing more than perpetuate the analysis paralysis that having too many indicators and settings on the chart can bring.

1. Choose a moving average combination that suits you

There are many moving average combinations out there. Some work some of the time, some work a lot of the time...but none work all the time. Many traders use the combination which resonates best for them by selecting a combination of three moving averages which move in tandem with each other. Each of the moving averages will correspond with a time horizon; long-term, medium-term and short-term. As we will later discuss, our combination will serve as our “template” to help pinpoint trading opportunities.

I use exponential moving averages; the 200ema, 50ema and the 20ema. It does not mean that you should too – they just happen to be the trio that have served me best for my trading and for the purpose of the following examples, I shall use this combination.

2.Look for order angle and separation

Now we have selected our (exponential) moving average combination, we now want to see if the conditions are right for a high probability trade to manifest itself, yet alone create a watch list. We can find potential trades using moving averages in trending markets only so for this purpose, we need to see if have the correct “order, angle and separation”

For an uptrend: we need the 20ema (or shortest-term moving average) to be above the 50ema (the medium term moving average). We want both the 20ema and the 50ema to both be above the 200ema (longer-term ema).  We want all three moving averages to be sloping upward with a degree of separation between them.

 

fx trader, forex, Moving, Average, Indicator, Bounces, Strategy, GBPCHF, Daily Downtrend
Chart 1. GBPCHF Daily: downtrend with descriptions

 

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