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Wednesday, February 16, 2011

Moving Averages

Randall asked the following question in comments:

"Hey X, just something I've noticed. You used to not use Moving Averages like the 5EMA and SMA, and it seemed like you were successful without them. But then you started adding them to your trade, what was the reasoning behind that? More importantly, has the MA improved your trading as well?"

I use the 5 and 8EMAs to determine if price is extended too far. If there is a good setup based on candlesticks and Fibonacci patterns, but there is a lot of "white space" between the current price level and the EMAs, most likely there will be a pullback. If you enter the setup under those circumstances, you may face a quick shakeout as price reverts to the mean (in this case, the 5 or 8EMA). It does not always work, as we have all seen cases of price that is extended too far, but continues to become even farther extended. However, the majority of time it is a great indicator. Not to mention that there are so many setups that occur off of the 5 or 8EMAs...you often hear me say "the EMA pushed price up", or "price bounced off the EMA", or "price found support at the EMA". It happens setup after setup, day after day.

The other moving average you see on my charts is the 100EMA. In my experience, if price is passing through or bouncing around the 100EMA, the setups are not as reliable. So you have to factor that into your risk analysis before taking the trade. Generally I avoid setups if this condition exists, but I have been known to break that rule if something is overly compelling.

I'm back so hopefully I'll have some charts up tomorrow or Friday.


1 comment:

Dominick said...

Thanks X