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An Alternate Way to Display Moving Averages
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Monday 19th December 2011
It's a REALLY quiet market so far today in the Crude Oil futures... so a good opportunity for me to work on a blog post to the side!!!
My charts often have a moving average... either a single EMA(20) or a combination of EMA's 15 and 20.
Today I want to show an alternate way of using moving averages which I've played with from time to time. Not all traders will have come across this idea so I thought I should share it - perhaps you'll find you like it!
Rather than a single EMA(20) of the Close Price, to use this as an example, we would instead display a combination of two EMAs; EMA(20) of the High Price and EMA(20) of the Low Price.
The above diagram shows the same price action on the left and right, but with the usual EMA display on the left and the alternate on the right.
Essentially it creates a tight channel with a line above the usual EMA(20,C) position, and another line below.
What I really like about this is the way it divides our price structure into different zones. You might want to categorise them loosely as bearish (below channel), neutral (within channel) and bullish (above channel). It can also help in adding some context or structure to the price swings and pullbacks, allowing you to judge likely pullback depth and recognize changes in strength or weakness as they occur.
But there are other ways to use it as well. You might want to consider the channel as a buy/sell zone for pullback entries. You might want to use the lines to provide different degrees of aggressive or conservative trailing stops.
Play around with it... you may find other benefits.
YTC Price Action Trader and YTC Scalper traders may wish to try this as an alternate to either or both of the Trading and Lower Timeframe templates.
The following chart examples show different markets and different timeframes. I haven't marked up the charts to identify the benefits and features described above. Try to see them for yourself.
If you like how this looks, open up your own platform and have a look at your preferred market and timeframe with an EMA(20) of the high and low. Maybe you'll find this improves your feel for price flow!
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December 20, 2011 10:03 AM
I can actually see a buy/sell positions forming either below or above the line...what I noticed is that it actually runs with a trend, so if you are patient, and confirm with candlesticks, there should be some pips to be made! Thanks Lance, I will definitely give it a go
December 20, 2011 12:24 PM
Hi Jean-Luc,
Absolutely - you will find setups both above and below the EMA lines.
In taking a position beyond the EMA's though, you need to be sure you've identified a trending environment. If you're wrong in this regard, and are entering late in a ranging environment, you'll likely get really poor results. It's a very "retail" entry.
Cheers,
Lance