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FREE EXPERT-4X ONLINE FOREX TRADING COURSE AND NOTES:
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1. Introduction 1.1 Review of Moving Average introduction These notes cover the following concepts and topics: Simple Moving Averages. Description of construction Rules of interpretation Front loaded Moving Averages Envelopes Bollinger Bands A Summary 1.2 Strategy applying Moving Averages as a trading system Very simply put, each time a moving average line cuts the price line from the bottom through to the top of the price line a buy signal is signaled. When the moving average cuts the price line from the top through to the bottom a sell signal is generated. 1.3 Common advantages of Moving Averages 1.3.1 They smooth the fluctuations in the price movement 1.3.2 They can be used as a trend indicator by using the slope of the Moving Average or by using 2 moving averages (see below) 1.3.3 Easy to use 1.3.4 They form a part of many profitable strategies 1.3.5 Very profitable in trending and volatile trading markets. 1.3.6 Good money management techniques can leverage profits considerably. 1.3.7 They can substitute the buy or sell signals when momentum indicators are in overbought or oversold levels. Much less risky as momentum indicators have been known to stay in the overbought and oversold levels in trending markets. 1.4 Common disadvantages 1.4.1 Moving Averages a lagging indicators and therefore tend to give late signals. 1.4.2 Not as sensitive as momentum and other indicators for picking tops and bottoms. 1.4.3 Care must be taken to set moving averages so that they do not result in many whipsaws (Set too fast - too few time periods) 1.4.4 Care must be taken to set moving averages so that they do not give away considerable profits on entry and exit. (Set too slow - too many time periods) 1.4.5 They do not work very well in sideways low volatility markets. Using moving average signals will result in many whipsaws. 1.4.6 They can result in many consecutive losing trades. 1.4.7 Priceline violations can occur numerous times before the moving average line crosses and separates from the priceline. A transaction management tool must be used to define what a valid priceline cut is e.g. the use of 2 moving averages, the formed candle or bar approach on longer time span graphs etc. 2. Two MA Crossovers as a trading system 2.1. Description. In this system a transaction is initiated not when the Moving Average cuts the priceline but when it cuts another slower moving average hereby eliminating many whipsaws. 2.2. Specific Advantages 2.2.1. Fewer whips saws 2.2.2. Cleaner cuts than using the priceline with 1 moving average. 2.3. Specific Disadvantages 2.3.1. Gives a slow trend change signal 2.3.2. The crossover sometimes can be a long way from the price. 3. Two Moving Average Crossovers - used a trend indicators 3.1 Description: 2 longer time scale, moving Averages are used to indicate the dominant longer term trend and when trend changes occur. These trend confirmations and changes do not necessary act as buy and sell signals (although they could). Their main purpose is trend indication. Some traders use a single moving average for the same purpose. 3.2 Specific Advantages 3.2.1 Visual 3.2.2 Simple 3.3 Specific Disadvantages 3.3.1 Slow trend change signal as it concentrates on longer dominant signals. A 70 and 80 moving average being used to give guidance regarding the trend on a 30 minute graph 4. Three Moving Average Crossovers 4.1 Description: This is an extention of the 2 moving average approach but in this case the slowest of 3 moving averages must cut with the fastest of 3 moving averages. The 2nd moving average acts as an early warning. Some traders use the 2nd moving average as the exit signal. 4.2 Advantages 4.2.1 More secure signals? 4.3 Disadvantages 4.2.2 Slower 5. Japanese double Moving Average Crossovers 5.1 Dead crosses / Golden crosses The Japanese have a specific filter when using the double moving average crossover method. A dead cross (Crossover of moving averages) is when the moving averages cross over when they are moving in opposite directions. They don't trade these crossovers. A golden cross is when the moving averages crossover when they are moving in the same direction. They treat this as a reliable signal for trading. 5.2 Discussion: It is worth testing this system on tight moving averages on the 30 minute graph. 6. Advancing Simple moving averages 6.1 Description; Certain software packages allow the position of the moving average to be advanced a number of positions or even setback a few positions. 6.2 Advantages 6.2.1Fewer whipsaws 6.3 Disadvantages 6.3.1Later signals 7. Multiple MAs 7.1 Description: a number of moving averages are loaded into a chart. I would suggest 13,21,34,55,89,144. The main use is to give a visual measure of market volatility and trend strenght. When the averages are bunched tightly it indicates low volatility caused by indecision. When the moving average lines are far apart they give an indication of a strong trend. 7.2 Advantages 7.2.1 Very visual 7.2.2 Easy to interpret 7.2.3 Confirm possible breakout opportunities. 7.3 Disadvantages 7.3.1 Cluters the graph which makes it difficult to use other indicators at the same time. 8. Bollinger bands Please refer to Pring's book and the MarketMap help for a discussion of Bollingerbands. Their main advantage is to use the bands as a volatility indicator. When they are close to each other they reflect low momentum or volatility with a likelihood of a breakout. When the price touches the bands it indicates strong momentum and a possibility of overbought or oversold levels. Bollingerbands will not be covered in more detail in this course. 9. Envelopes Please refer to Pring's book and the MarketMap help for a discussion of Envelops. Their advantage is to use the bands as overbought and oversold indicators by setting the envelopes to contain 90% of the price movement. When the bands are touched or exceeded one should be on the lookout for retractment or reversal opportunities. They are also very useful for setting channel trading boundaries. Envelopes will not be covered in more detail in this course 10. Dealing with whipsaws The main disadvantage to moving averages is that they result in many whipsaws, which reduce profitability using moving averages considerably. Ways of filtering out unprofitable transactions are: Only trade moving averages if: 10.1 a meaningful trendline violation in the area of the moving average cut occurs. 10.2 the trade is with the trend as read from a longer time span graph. 10.3 other indicators to confirm the strength of the transaction e.g. Parabolics, momentum indicators, the MACD 10.4 multi-time scales confirm all of the above signals. 11. Using moving averages on indicators Just as moving averages can be applied to smoothing the price movement they can also be applied to indicators to smooth their readings and also result in possible buy or sell signals. This will be covered in more detail in the indicator section. |
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| We hope that you find these notes useful and informative. If you have an queries or want to contribute your views to the content of these note please use the contact us facility on this site. We welcome any exchange that will enhance your Forex trading. |