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Chapter 11, Part V. Using Moving Averages. Displaced MA. Page 2

Discussion in 'Complete Trading Education- Forex Military School' started by Sive Morten, Dec 18, 2013.

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  1. Sive Morten

    Sive Morten Special Consultant to the FPA

    Aug 28, 2009
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    Chart #1 EUR/USD 30-min and 12-period SMA

    Starting on the left-hand side, the first trade gives us a shallow loss, because we’ve sold a bit lower than we bought back. Here we also open a new long position, and this second trade gives us an excellent profit, because the market has not shown any close below SMA till the first “S” in grey rectangle. Here we’ve closed our long position and entered short. And here our problems have started – all trades in the rectangle have ended with a loss. I intentionally link the price action with a line, just to show you, why it is called whipsaw… Since SMA is a lagging indicator it is just not hasty enough and can’t react quickly to fast changes in market behavior in time. This leads us to loss. Here is the conclusion:

    With assumption that SMA period is constant and we do not change it depending on price action (trending or ranging), trading with an MA could lead us to solid profits in a trending market and losses when the market turns to consolidation.

    The second problem is a possible unwelcome short time splashes in trend that are also called as fake outs. Here is what it looks like:

    Chart #2 EUR/USD 30-min and 12-period SMA

    See, the potential profit without the fake out was pretty, but due to some reason, the market has penetrated the SMA (may be some macro data has been released) and you had have to buy there according to the strategy we have selected, but right after the next bar, the market has returned back and continued the trend down. Here you have to close your long position with a loss and re-enter short again. Although, you will have the profit at the end of this trend, you have passed through a not very pleasant moment during fake out and took some losses there.

    Pipruit: And what we can do to reduce the probability of such losses?​

    Commander in Pips: The most common approach to this is to use not just one but two MAs on the chart.

    And what it could give us?​

    Commander in Pips: While the faster MA is above the slower MA, the trend is bullish. If it moves below the slower MA, the trend turns bearish. Sometime application of two MAs allows us to avoid unwelcome trades due to fake outs.
    #1 Sive Morten, Dec 18, 2013
    Lasted edited by : Mar 12, 2016
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