Thursday, May 24, 2012

Multiple Moving Averages At Work

/tf breaks prevailing trendline and rips faces off shorts

Finding the start of a new trend is key skill.  There's a lot more to trading than a good entry, but let's face it, it's hard to go wrong when your entry is spot on perfect.

I am now looking at 5 moving averages on my chart:  9, 20, 33, 50, 99 period.  The MAs flow like a ribbon and fan out when the market is speculating and converge when there is price agreement.  They also help you clearly see trend direction.

The /tf actually had several up and down moves before the big one at 3:15.   Lots of news creates lots of uncertainty.  However, the 100 tick rally in /tf end of day had several indicators that might have prompted one to enter at the very onset.

The first noticeable pattern was the clear trendline that was sloping down from 10:30 am.  The market was falling apart.  The 99 period MA (orange) is the top line for most of the decline, which means the major trend is down.  It's very hard to get long when this condition is true.

At 3:03 -- the first clue should hit most /tf traders as a volume candle pops price above this well-developed trendline.  This proves not to be enough and the bounce fades below  again.

But then a tight, symmetrical 3-bump pattern emerges and the moving average ribbon is starting to trend up.

At 3:17 the trendline is broken at last and an entry around 759 at worst with a 10 tick stop would have been good for a nice ride.  Notice at this point that all the moving averages have stacked on top of each other and now the 99 period is underneath, sloping up, indicating support from longer term investors.

So elements that helped with this trade are:

1) moving average ribbons to indicate trend
2) trendline formation and subsequent break of prevailing trendline to indicate new market forces
3) 3-bump patterns -- often form before major moves
4) critical time of day for big moves (11:30 am when European session closes, 2:30, 3:15ish)

Hope someone caught some of this move.

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