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14_Fading Moving Averages

Fading the Moving Average

  1. Choosing the Right Moving Average:

    • Moving Average Selection: Select an appropriate moving average type (e.g., SMA or EMA) and determine the period length (e.g., 15-day or 20-period) that aligns with your trading objectives.

  2. Trend Analysis via Moving Average:

    • Trend Identification: Utilize the moving average to discern the prevailing market trend. A price consistently above the MA indicates an uptrend, while a price below suggests a downtrend.

  3. Identifying Price Deviations:

    • Spotting Extremes: Watch for significant deviations from the moving average, signaling potential overbought (in uptrends) or oversold (in downtrends) conditions, and indicating a probable price correction.

  4. Implementing Contrarian Trades:

    • Contrarian Positioning: When notable deviations from the MA occur, contemplate contrarian positions. In uptrends, consider short positions when the price is well above the MA, and in downtrends, evaluate long positions when the price falls well below the MA.

  5. Seeking Additional Confirmation:

    • Enhancing Trade Confidence: Supplement your analysis with additional technical indicators or patterns for improved decision-making. Look for divergent highs/lows, analyze swing points, evaluate consecutive closes, or consider the 4 to 9 bar cycle count to bolster trade confirmation.

Strategy Nuances:

  • Trading with the Trend: Aim to trade in the direction of the overall market movement for higher success rates. Buy on dips below the MA in uptrends and sell on rallies above the MA in downtrends. This approach, known as "FAIL" (failing the moving average), targets entry or exit points during temporary deviations, with the objective of re-entry at more favorable prices.

  • Divergence and Cycle Considerations: Remain vigilant for divergent high/low patterns and concurrent occurrences of the 4 to 9 bar cycle count during "FAIL" instances. These indicators can significantly reinforce the case for a potential reversal, providing a comprehensive understanding of market dynamics.

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