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HOW TO TRADE MOVING AVERAGES WITH PRICE ACTION

When you use price action trading with one other indicator or a combination of indicators which are incorporated into your trading system then that’s what I call Not-So-Pure Price Action Trading. (Call it whatever you like, if you think I’m wrong, I really don’t care).

Many new traders that find it difficult to define the structure of a trending market, therefore they rely on moving averages for trend detection or identification.

The only thing I see useful in moving averages is for dynamic support and resistance levels. I will explain this

HOW TO TRADE MOVING AVERAGES WITH PRICE ACTION -price action trading strategy

concept shortly. As a matter of fact, moving averages do a terrible job of predicting trends in that they only do that after that trend has already started already and the price has moved a great deal already.

So price action is telling you that you are now potentially in a downtrend but moving average is saying “not yet”.

So you have two conflicting signals. And by the time moving average confirms what the price action has indicated,

HOW TO TRADE MOVING AVERAGES WITH PRICE ACTION -price action trading strategy

price has already made plenty of moves downward already as shown by this chart on the left.

So which are you really going to pick? Depend on moving average to tell you that a trend has changed or depend on price action?

I really can’t force, it’s your choice.

Using Moving Averages For Dynamic Support And Resistance Levels
The concept of dynamic support and resistance can be fully understood with a few charts given below.

When the market is in a downtrend, you will notice that price moves up to the moving average lines (upswing) and then bounces back down from them (downswing). (That is if you put moving average lines on your charts).

Here’s an example:

HOW TO TRADE MOVING AVERAGES WITH PRICE ACTION -price action trading strategy

The similar situation happens in an uptrend: prices move down to the moving average lines (downswing) and then bounces up from them (upswing).

Here’s an example is shown on the chart below:

HOW TO TRADE MOVING AVERAGES WITH PRICE ACTION -price action trading strategy

Now that you know this concept of dynamic support and resistance using moving averages, the next thing you need to know is that trend trading strategies can be created around them and in a very nice trending market, they are really effective.

For those that love moving averages, what you can do is to look reversal candlesticks as the price starts to go back to touch the moving average lines and these are used as your confirmation signal to buy or sell.

In a downtrend, you should be looking for bearish reversal candlesticks like the shooting star, bearish harami, spinning tops, dark cloud cover, hanging man etc to go short (sell).
In an uptrend, you should be looking out for bullish reversal candlestick patterns like pin bars, dojis, piercing line, bullish harami etc…
Let’s study the past again…on the chart below is an example of how to trade dynamic support with Price Action:

HOW TO TRADE MOVING AVERAGES WITH PRICE ACTION -price action trading strategy

Now, it’s easy to say here that “ you could have bought here and sold here” etc based on what happened in the past because now you can see how the market has played out in the past…

But the real challenge for many traders is that when a setup is happening, they will most likely the second guess it because this is how it’s going to look:

HOW TO TRADE MOVING AVERAGES WITH PRICE ACTION -price action trading strategy

And this is how it turned out:

HOW TO TRADE MOVING AVERAGES WITH PRICE ACTION -price action trading strategy

Here’s an example of trading using dynamic resistance levels with price action:

HOW TO TRADE MOVING AVERAGES WITH PRICE ACTION -price action trading strategy

Source

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23 Jan 2019 11:23 am Posted by tamilforex

 
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