Moving Average with Price Action
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http://www.tradingsetupsreview.com/day-trading-with-20-period-moving-average/
This method uses a 20-period simple moving average (SMA) with price action to clarify the intraday trend. Essentially, we are looking for a shallow pullback followed by a new high (low) to confirm a bull (bear) trend.
To confirm a bullish intraday trend, look out for the following conditions. The rationale for each condition is in brackets.
- Price touches the moving average. (Establishes baseline. Useful for sessions that open with a gap.)
- Price stays above the moving average for at least one bar. (Bullishness)
- Price retraces down towards the moving average without making any bar high below the moving average. (Lack of bearish commitment)
- Bull trend confirmed when price rises above the last extreme high. (Confirmation of bullish market structure)
To confirm a bearish intraday trend, look out for the following.
- Price touches the moving average.
- Price stays below the moving average for at least one bar. (Bearishness)
- Price retraces up towards the moving average without making any bar low above the moving average. (Lack of bullish strength)
- Bear trend confirmed when price falls below the last extreme low. (Confirmation of bearish market structure)
Let’s take a look at an example from the NQ futures market.
This session opened with a bullish gap.
- Instead of guessing if the gap would start a new bull trend or close the gap, we waited for price to return to our benchmark SMA.
- Price touched the SMA.
- This bar stayed below the SMA, confirming the bearish momentum,
- This bar made a higher bar high but could not even rise to test the SMA.
- As the market fell past the last extreme low below the SMA, we confirmed a bear trend.
This intraday bear trend held up for the rest of the session, despite a 50% pullback in the middle of it.
Trading with just a 20-period moving average is an excellent starting point for any trader.
Determining the price action context, whether the market is trending or in a range, requires discretion and experience. A moving average can help to clarify the price action.
These are some questions to help you clarify the context using a moving average.
- Are prices above or below the moving average now?
- How did prices get there?
- Have prices been overlapping with the moving average?
- What is the slope of the moving average?
- Has the slope been changing often?