Posted by Tom C.
Regular readers know that I use MAs in my trading. One setup I like to trade is a large gap where price moves in the opposite direction (of the gap) to tag the 8EMA - you can think of it as a "reversion to the mean" trade.
Please note, this is a higher-risk setup; it is higher risk because price does not have to rally (or fall) to the 8EMA...it can move sideways until the 8EMA "catches up", or it can continue in the direction of the gap at a slower pace until the 8EMA "catches up". So it is important to only take strong setups with good candlestick patterns.
BP from today is a classic example of the setup I like. Price had a large gap down but the first bar was strong. The second and third bars consolidated in the upper half of the first bar's range with the third bar being solid green (opened near the low, closed near the top). It was also a narrow-range, inside bar.
I bought on a break of the third bar's high, and my initial target is the 8EMA (white MA line). I also look for other areas in the vicinity to confirm (or adjust) my target. As you can see on the second chart, I plot my Fibonacci lines over the previous day's high to the OR low and the 50% retracement is just above the 8EMA. I closed the position at that level, and it proved to be solid resistance throughout the morning.
A Simple Mistake Traders Make
7 hours ago