Some charting packages also have a WMA option.
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As explained in the previous paragraph discussing EMA, the WMA places more emphasis on the more recent data but the way it is calculated is different. How are these lines used by traders?
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There are two common ways an advanced method is exposed in the next section. Method 1 is that traders pay attention to when the market price crosses over a certain period MA usually just one line on the chart. Method 2 is that traders pay attention to when a shorter period MA crosses a larger period MA usually two lines on the chart.
Actually, what I just said is not completely true. Traders often do have multiple MA lines for this method simply to watch when the market penetrates through any of those lines. Common daily periods observed by many traders include 50, , and Why these numbers?
Well some people may give you some nice sounding rational behind these numbers but truthfully they are just nice round arbitrary assignments; you could use weird numbers like 47, , and about as effectively. Many traders consider penetration of these MA lines to be a significant event. Well just look at those lines on the chart above. This is such a simple indicator, yet it is sooooooooo very powerful, and if you were to only trade based upon this then you would do quite well for yourself.
This simply involves having two MA lines either simple or exponential an observing when the two lines cross. The numbers 5 and 20 are commonly used for this method on various timeframes, but you can play around with other combinations. This means that it clearly shows the direction of the market, but only AFTER it has already begun to do so. This indicator has little predictive power, and often once the opportunity is recognized the trader may only jump into a trade late in the game; often too late. That said it does still have value as when properly done a few nice trades can more than compensate for a few losers, or breakeven trades.
This synergistic combination in fact adds an additional perspective useful to analyzing the actions of the market. Later in this eBook we will revisit and touch upon this subject to see how these concepts. A lot of traders are familiar with the concept of moving average crossovers, but like I said before the S. As the shorter period crosses over the longer period it shows the direction that the market is trending in. If the shorter period i. If the shorter period is below the longer one then it is because the market has been moving down.
Lagging means that it shows the direction the market is moving in AFTER it has started to move in that direction. Let us now begin to explore how the S. Variation 1. The smaller the period the more sensitive will be the crossovers thus more quickly showing small changes in the trend i. Traditional MA crossovers, as well as the basic S. The primary purpose of watching MA crossovers, and of course S. What periods should you use? One more note here — you may notice that a pair of S. Though they share some commonalities they still behave a bit differently, and more importantly because S.
Loosely defined, S. This is where the value of using S. Here is what I do and my justifications for the periods selected. On this chart you will have 6 MA. Set one pair for 5, the second pair at 20, and the third pair for Ok, why these periods? Some traders use arbitrary numbers for their MA crossovers, and it works for them, however I like to use these numbers on a daily candle chart for a specific reason. You can of course add even more S. Bring up another chart and duplicate your lines on it, however just replace the 20 with a Now that you have all these lines on your chart it can start to look confusing.
It is important to change the colors of your lines to make them easy to distinguish from each other. The green money line is the one that most closely follows the actual price movements, and when it crosses the other lines on your charts it will show you to describe it simply the direction the market is currently moving in. I have selected this chart snippet because it nicely illustrates a few key points about this technique. Take a good look at what the lines are doing in the chart example above, and look at some live charts on your own before reading the next section.
Just be looking you should begin to see some interesting things that these lines are showing you. When you are done studying some live charts come back here to read what I wrote and compare it with your observations. What this is showing you is that there is no clearly established trend. The markets are moving sideways — they go a bit up, they go a bit down, and keep bouncing within a rather small range.
You should. Suggested styles of trading would be range trading techniques i. Obviously time to employ short term trading techniques to capitalize on the small trends that last just a few days good profits to be made doing that of course. Here is an interesting observation to make that can be clearly seen on the chart above… notice how the bunched lines can sort of show you approximately the mid-point of a consolidation.
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One useful application of this is to look for opportunities to get into the market long when below the bunch, short when above the bunch and to start tightening your stops when you get over to the other side of the bunch to exit the trade when it starts to turn around.
This chart here is a little zoomed out so you can see a few places where you got bunches, and how they can appear differently. Notice that in the first circle the big one on the left it formed a triangle pattern where the lines bunched. The market then exploded upwards and then got bunched in a large consolidation circle 3 that still had an upward slant. I just want you to see that bunches can be large, small, in a perfect sideways motion, slanted, in a triangle, or just about any sideways moving variation you can think of.
Obviously this will positively affect your account balance as well as your confidence levels. Though they started to un-bunch you still need to wait until the market moves beyond a technical price point. Here I drew a horizontal line as you can see on the chart at 1. In this case you happen to have a nice wave. What is more interesting is that the 20 S. Here are a few interesting characteristics of the 20 S.
Notice that as the market has started to trend upwards the purple line crossed over and stays above the black line. This shows you that the market is now trending up. The farther apart these lines get shows how strongly the market is trending. The closer they get can show a slow down in the momentum of the trend, or if they start colliding towards each other it may mean that the market has begun reversing.
Those of you who are familiar with MACD will notice the apparent similarity, and hopefully will recognize the benefit of using S. Near the middle of the trend there was a retracement down, and notice how all of a sudden there the purple line got closer to the black. After that they got narrower and narrower unto poof they crossed over, yet the candles are still well above the 20 S.
You pay attention to whenever your 5 and 20 period S. Needless to say, when you start seeing things such as the stuff mentioned above you start to get antsy, and you bring in your stop loss tight. Soon afterwards your candles plunged through the trend line and the 20 S. Not bad for a trade lasting under 2 months, especially considering that this example is more or less just an average example and by no means one of the more impressive ones that happen quite often. The huge uptrend on the left is basically a replay of the example we just discussed in detail. This one could have yielded between to pips pips depending on how conservatively or boldly you played it within 2 to 3 months you do the math of approximately how much this could have profited you by the size of your actual account using proper equity management principles.
The huge downtrend on the right that is still in progress to date would yield, so far around pips. What is interesting interesting to notice is how near the bottom there it has been rebounding off of o f the 20 S. All good. Sometimes by following following the rules you score perfectly, perfectly, getting stopped out near the peak of the profit potential, and sometime you cut yourself short from from the maximum profits. Near the top you have a nice nice triangle formation and inside inside especially near the apex of the triangle your S. Soon after the breakout you would have been trying to find a suitable place to jump in using any of several entry techniques as you have established that some kind.
You had a strong down trend for several days, and then it weakened weakened but continued to down trend.
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So far so good. What happened next? Two days after they crossed crossed they got penetrated by the candles. At this point you would be justified in feeling somewhat nervous and wanting to exit to preserve your gains. But hold on.
What you do is you start tightening up your stops. Next the market kept on moving down whew. You would now set your stop stop to be at that high to protect the profits you have made thus far. Then the market moved back up and consolidated.
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Your green money money line 5 period S. Usually when the 5 crosses crosses the 20 S. That second red candle that formed formed a high would be your obvious choice to reset your stop at after the market moved down do wn a bit a couple days later. Well, most often this would have been the end, end , but surprise surprise you got lucky! So far this one trade trade is well over pips in just 2 months! Often situations like like this end up retracing retracing to.
Take a look at the following chart. Near the beginning you see that your 5, 20 and 60 S. Obviously we are looking at the major uptrend here.
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Near the bottom you see your 20 S. The 20 S. Obviously this is all good and you are still in the trade. Then the inevitable happens — the market retraced back down.