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Chapter 11, Part V. Using Moving Averages. Displaced MA.

Discussion in 'Complete Trading Education- Forex Military School' started by Administrator, Jun 21, 2011.

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  1. Administrator

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    Part V. Using Moving Averages. Displaced MA. [​IMG]
    Commander in Pips: : So, let’s finally shift to the application of Moving Averages. As we’ve already said in the previous part, we may use an MA for trend estimation. The simplest way to use it is as follows:

    1. If market shows close above some MA – the trend is bullish;

    2. If market shows close below some MA – the trend is bearish.

    You may use different variations of this strategy.

    [​IMG]
    For example, you may apply not single close, but two or three closes above or below and so on. The point is that the overall strategy doesn’t change. But here I want to note a very important feature of any MA:

    1. MA is a lagging trend indicator. It means that first, it based on some preceding price action, and, second – it needs some time to react on this price action;

    2. This lead us to next conclusion – since an MA lags after the market and when the market changes direction fast and often compared to the MA period, it leads to whipsaw price action. Appling an MA for trading in these circumstances could lead to losses.

    Pipruit: And, how does it look like – whipsaw?​

    Commander in Pips: Look on chart #1 in the rectangle:


    Chart #1 EUR/USD 30-min and 12-period SMA
    [​IMG]

    Let’s assume that we apply simple strategy, as we’ve said – close above the SMA means trend is bullish, so we buy. Close below the SMA means the trend is bearish, so we sell. Keep in mind here, that with buying and selling we are not just closing our previous position, but also open another one, according to the current trend. I’ve marked on the chart candles with “B”, where this strategy says we should to buy and “S” where we have to sell. So, for instance – take a look at earliest S and B on the chart. First, we sell, then at B point we’ve closed this position and opened a new one simultaneously. So, in the first “B” point on the chart – we have open bullish position. Other words we always have open position in the direction according with the trend. Now let’s move through the chart:
     
    #1 Administrator, Jun 21, 2011
    Lasted edited by : Mar 12, 2016
    Hamza Samiullah and fran alvarez like this.
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