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Chapter 11, Part II. Simple Moving Average. Page 4

Discussion in 'Complete Trading Education- Forex Military School' started by Sive Morten, Dec 17, 2013.

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  1. Sive Morten

    Sive Morten Special Consultant to the FPA

    Aug 28, 2009
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    Pipruit: And how to estimate trend direction with MA?

    Commander in Pips: Well, you can apply different ways to do that, but I’m a fan of the simple approach. My slogan is to keep all things as simple as possible. I can apply sophisticated tools and strategies, but only when it is absolutely unavoidable. So, my approach is as follows:

    If market’s close price is above some SMA, then the trend is bullish. If it closes below some SMA – then the trend is bearish.

    Pipruit: And what periods we should use for that?​

    Commander in Pips: It’s impossible to answer on this question in a single way, because choosing a period for trend estimation is a very personal procedure and will depend on your trading style, preferred time frame for trading and other moments. You should estimate it for yourself, relying on your experience. But I will give you some numbers. Here are some well known numbers:

    - 50-period SMA is a very popular on the Stock market;

    - 200-period SMA often applies on the Stock Market and Futures market as a long term trend indicator.

    - You may use different numbers for different trends. For example, a 7-period SMA is for the short-term trend and a 25-period is for the long-term trend.

    Pipruit: Thank you. And how to treat such a situation, when the market shows a close below 7-period SMA, but above 25-period SMA?​

    Commander in Pips: Then, it tells you, that short-term trend is down and long-term trend is up.

    Pipruit: And if the market closes above the 7-period SMA on an hourly chart, but below the 7-period SMA on daily time frame.​

    Commander in Pips: Well, you’ve touched very important topic – how to combine different time frames in trading. We will talk about it in details in later chapters. But here the answer is – you will have up trend on the 4-hour time frame and a down trend on the daily time frame. Later you will understand that there is no contradiction here.

    Pipruit: And what if the close price is above SMA, but price of a current bar is below it?​

    Commander in Pips: It tells us that confirmed trend is bullish, but the unconfirmed one is bearish. As you remember, we use close price above or below some pattern or indicator as a confirmation. But again – this is a question from another topic - how to ride the trend and how to trade it. Currently we speak purely about the nature of MAs…And trend estimation and trading we will cover in later chapters.

    P.S. This lesson was written by Sive Morten, who has been working for a large European Bank since April of 2000, and is currently a supervisor of the bank's risk assessment department. Sive's knowledge of forex market and banking industry is vast and quite complete. If you have any specific questions about forex, banking industry, or any other financial instruments, please post themon the next page and Sive should answer soon.

    Note: FPA ranks are earned in the battles against scam, not in the classroom.
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