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Now, if you have a sideways market for a particular time frame, you can try to trade both the sell and the buy signals from a particular indicator. However, if you take into consideration the larger-degree trend, you may once again decide to ignore the signals that do not support this larger-degree trend. In that way, you further increase your odds of success and the best thing is you will trade less!

Let’s take a look at another example on Chart 2, this time from the stock market and on a lower-degree time frame.

Technical anlaysis moving averages

Basically you see the same concepts applied on the hourly chart here. What’s the major trend on the hourly chart? – it is down. Why? Because almost all the time the prices are below the declining 100-hour moving average (the blue line) and all the time they are below the declining 200-hour moving average (the green line). And these longer-term moving averages are both trading down hard. If you look at the chart at that moment, you will also define the current downtrend as strong because the prices are below the declining 21-hour moving average as well. So, the short side is favored here (by the way, we all know this market continued lower for a few more days here and reached a major bottom on November 15th, almost 100 points lower than the last price on the chart above). And for completeness, I have marked the sell signals from the hourly Stochastics indicator, which provide the high probability trade set-ups on this chart.

CONCLUSION

Most people try to trade both with the trend and against the trend. Of course, depending on how successful your analysis is and how well you manage the size of your positions and your emotions, you can always trade in both directions. However, the odds of being right are greater if you trade with the prevailing trend. And usually that is best done when you try to enter (long or short) on pullbacks. These are the trades that can bring you the greatest profits and if you are patient enough, there are always such high-probability opportunities. The problem is that sometimes it is too difficult for us to wait on the sidelines and do nothing for several days, or several weeks or several months (depending on your time frame horizon). Using a simple method of two moving averages can put you almost always on the “right” side of the market. Simply ask yourself these three questions:

  • Where is the price compared to its 100-period MA?
  • What’s the trend of the 100-period MA?
  • To define the strength, ask yourself: where is the price compared to a fast moving average (like 21-period MA) and what’s the direction of this MA?
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