Moving averages smooth the price, so that short term fluctuations are removed, and the overall direction is shown. When the price experiences a strong move, it will have a tendency to retrace back to the moving average, but then continue the original move, and it is this bounce that is used by the moving average bounce trading system.
The default trade uses a 1 to 5 minute OHLC (Open, High, Low, and Close) bar chart, and a 34 bar exponential moving average of the typical price (HLC average). Both the chart timeframe, and the exponential moving average length, can be adjusted to suit different markets.
Wait for Price and Moving Average to Touch
Wait for the price to touch the moving average, which happens when the price trades at the current moving average price.
For a long trade, the previous price bars should have been making lower lows as the price approached the moving average, and for a short trade, the previous price bars should have been making higher highs as the price approached the moving average. There is no specific number of bars that need to make consecutive lower lows or higher highs, but I recommend at least 3 bars.In the chart shown below, the price touches the moving average on the fourth bar to make a consecutive lower low.
The moving average bounce trading system uses a short term timeframe and a single exponential moving average, and trades the price moving away from, reversing, and then bouncing off of the moving average.
Enter your Trade
Enter your trade when the high (or low) of the first price bar that fails to make a new low (or high) is broken.
The following list shows the steps required for both long and short entries :
Long Trade
Price bars make lower lowsPrice bar touches the moving averageSubsequent price bar fails to make a new lowSubsequent price bar breaks the high of the previous price bar
Short Trade
Price bars make higher highsPrice bar touches the moving averageSubsequent price bar fails to make a new highSubsequent price bar breaks the low of the previous price bar
In the trade shown on the chart below, the bar that failed to make a new low is shown in white, and the entry is shown by the arrow. The entry is at 1.2995, with a target of 1.3005, and a stop loss of 1.2990.
There is no default order type for the moving average bounce trade entry, but for the EUR the recommendation is a limit order.
As soon as your entry order has been filled, make sure that your trading software has placed your target and stop loss orders, or place them manually if necessary.
There is no default order type for either the target or stop loss, but for the EUR (and usually for all markets), the recommendation is a limit order for the target, and a stop order for the stop loss
There is no default order type for either the target or stop loss, but for the EUR (and usually for all markets), the recommendation is a limit order for the target, and a stop order for the stop loss
Wait for your Trade to Exit
Wait for the price to trade at your target or at your stop loss, and for either your target or stop loss order to get filled. The moving average bounce trade can take anywhere from a few minutes to a couple of hours to reach your target or stop loss, and the trade does not use any target or stop loss adjustments (except moving the stop loss to break even at a suitable time).The targets that are shown on the chart are at 1.3005 (10 ticks), 1.3015 (20 ticks), and 1.3025 (30 ticks), all of which were filled by this trade.
If your target order has been filled, then your trade has been a winning trade. If your stop loss order has been filled, then your trade has been a losing trade.
http://daytrading.about.com/od/tradingsystems/ss/MovingAverageBo.htm
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