Friday, 26 January 2018

Moving Channels

Trade with moving channels
DUAL moving average crossover systems - where moving averages of a variety of different periods may be used to determine entry and exit points when the moving averages cross each other - have been discussed before.

The moving average channel technique, however, offers a trading system that gives faster signals more frequently. These moving averages may also be used as resistance lines in a bearish trend, and support lines in a bullish trend.

You should test periods of moving averages to find the one that suits your trading style, as different ones will give either faster or slower signals.

For example, apply a 20-period exponential moving average calculated on the price lows, and another calculated on the price highs.
These two moving averages then form the channel (red lines). The moving average on the price lows will offer a support line in a bullish trend, and that on the price highs a resistance line in a bearish trend.

To generate buy and sell signals, apply a five-period exponential moving average (blue line) and interpret it as follows:
Buy signal: Five exponential moving averages (EMA) crosses above the 20 EMA on the price highs.
Sell signal: Five EMA crosses below the 20 EMA on the price lows.

This filters out the false signals often generated by moving average crossovers during a period of price consolidation. Do keep in mind that the price may retrace to the 20 EMAs - therefore, an exit signal is not reliable on simply applying the reverse of this method (i.e. exit the long if the five EMA drops back below the 20 EMA on the price highs, and vice versa). Consult other indicators for exit signals.
By Joe Meyer - - 18 February 2010