The next lesson in free video stock trading course which covers how to buy and short sell stocks on margin.
Indicators - Accumulative Swing Index (ASI)
Indicators: Accumulation Swing Index (ASI)
newdigital, 2013.09.04 15:09
Developed by Welles Wilder in his popular technical analysis book New Concepts in Technical Trading Systems, the Accumulative
Swing Index (ASI) is mainly used as a divergence and confirmation tool, but can
be used for buy and sell signals as well. It was designed to be used for futures
trading, but can be used for stock trading and currency trading too. Basically,
the Accumulative Swing Index is a running total of the Swing Index (see: Swing Index).
The chart below of gold futures shows the Accumulative Swing Index:
In the chart shown below, the Accumulative Swing Index confirmed Gold's
downtrend. Subsequently, when Gold broke the downward trendline, the
Accumulative Swing Index confirmed the trendline break as well.
Similarly, the upward move in the Gold futures contract was confirmed by the
Accumulative Swing Index and the upward trendline break was confirmed too.
Buy when Accumulative Swing Index breaks above a downward trendline or, in a
price consolidation period, above resistance.
Sell when the Accumulative Swing Index breaks below an upward trendline or,
in a price consolidation period, below support.
Bollinger bands - How To Master Bollinger Bands
Techniques for mastering Bollinger bands for maximum profit. 5
Bollinger bands set-ups and their variations that you must know if you
want to use Bollinger bands effectively.Bollinger bands are about the best indicator you will ever use to help identify high probability trades.Bollinger
bands measure a standard deviation from the mean or middle. Usually
the "mean" or middle is a 21 day moving average of closing price.
you would lay down a 21 day moving average and then a 2.0 standard
deviation set of Bollinger bands and when price closed outside of
either band it is said to have closed outside a 2 standard deviation
Indicators: Bollinger Bands ®
newdigital, 2013.08.06 13:49
Bollinger Bands Forex Trading Indicator
Developed by John Bollinger.
The Bollinger Bands indicator acts as a measure of
volatility. This indicator is a price overlay indicator. The indicator
consists of three lines; the middle line (moving average), an upper line
and a lower line. These three bands will enclose the price and the
price will move within these three bands.
This indicator forms upper and lower bands around a
moving average. The default moving average is the 20-SMA. This
indicator use the concept of standard deviations to form their upper
and lower Bands.
The example is shown below.
Bollinger Bands Indicator
Because standard deviation is a measure of
volatility and volatility of the market is dynamic, the bands keep
adjust their width. higher volatility means higher standard deviation
and the bands widen. Low volatility means the standard deviation is
lower and the bands contract.
Bollinger Bands use price action to give a large amount of information. The information given by the this indicator includes:
newdigital, 2013.08.06 13:51
How Bollinger Bands Indicator Works
Bollinger Bands calculations uses standard deviation to plot the bands, the default value used is 2.
Bollinger considered the best default for his
indicator to be 20 periods moving average and the the bands are then
overlaid on the price action.
Standard Deviation is a statistics concept. It
originates from the notion of normal distribution. One standard
deviation away from the mean either plus or minus, will enclose 67.5 %
of all price action movement. Two standard deviations away from the mean either plus or minus, will enclose 95 % of all price action movement.
This is why the Bollinger Bands indicator uses the standard deviation of 2 which will enclose 95 % of all price action.
Only 5 % of price action will be outside the bands, this is why
traders open or close trades when price hits one of the outer Bands.
The Bollinger Bands indicator main function is to
measure volatility. What the Bollinger Bands upper and lower limits try
to do is to confine price action of up to 95 percent of the possible
This indicator compares the current closing
price with the moving average of the closing price. The difference
between them is the volatility of the current price compared to the
moving average. The volatility will increase or decrease the standard
Bollinger Bands and Forex
In this video I'll show you a set-up using Bollinger bands that you can
use to make virtually unlimited profits with Bollinger bands.
you have to do here is pay careful attention to swing structure and
price actions failure to print a new swing high. In this case when the
new high failed to print on the chart we ended up with nearly a
double-top, which is equally as powerful but because the high was
actually lower than the previous it wasn't quite a double top.
In this case it was a LOWER SWING HIGH.
When that happened we
ended up with a consolidation, a pinching of the bands and then
ultimately a nice Bollinger band expansion followed by a break of the
lower support levels and a perfect low risk high profit entry into a
move that collapsed down to a quick fast 400 pip profit in a total of 4
newdigital, 2013.08.06 13:54
Bollinger Bands and Volatility
When volatility is high; prices close far away from
the moving average, the Bands width increases to accommodate more
possible price action movement that can fall within 95% of the mean.
Bollinger bands will widen as volatility widens. This
will show as bulges around the price. When bollinger bands widen like
this it is a continuation pattern and price will continue moving in this
direction. This is normally a continuation signal.
The example below illustrates the Bollinger bulge.
High Volatility and Low Volatility
When volatility is low; prices close closer towards
the moving average, the width decreases to reduce the possible price
action movement that can fall within 95% of the mean.
When volatility is low price will start to
consolidate waiting for price to breakout. When the bollinger bands is
moving sideways it is best to stay on the sidelines and not to place any
The example is shown below when the bands narrowed.
newdigital, 2013.08.06 13:57
Bollinger Bands Indicator Bulge and Squeeze Technical Analysis
The Bollinger Bands are self adjusting which means the bands widen and narrow depending on volatility.
Standard Deviation is the statistical measure of the
volatility used to calculate the widening or narrowing of the bands.
Standard deviation will be higher when prices are changing
significantly and lower when markets are calmer.
The Bollinger Squeeze
Narrowing of Bands is a sign of consolidation and is known as the Bollinger band squeeze.
When the Bollinger Bands display narrow standard
deviation it is usually a time of consolidation, and it is a signal that
there will be a price breakout and it shows people are adjusting their
positions for a new move. Also, the longer the prices stay within the
narrow bands the greater the chance of a breakou
The Bollinger Bulge
The widening of Bands is a sign of a breakout and is known as the Bulge.
Bollinger Bands that are far apart can serve as a
signal that a trend reversal is approaching. In the example below, the
bands get very wide as a result of high volatility on the down swing.
The trend reverses as prices reach an extreme level according to
statistics and the theory of normal distribution. The "bulge" predicts
the change to downtrend.
How to Trade Bollinger Bands - Stocks, Futures, Forex
Full text of this video :
Bollinger Bands are comprised of three bands which are referred to as
the upper band, the lower band, and the center band. The middle band is
a simple moving average which is normally set at 20 periods, and the
upper band and lower band represent chart points that are two standard
deviations away from that moving average.
Example of Bollinger Bands ...
Bollinger bands are designed to give traders a feel for what the
volatility is in the market and how high or low prices are relative to
the recent past. The basic premise of Bollinger bands is that price
should normally fall within two standard deviations (represented by the
upper and lower band) of the mean which is the center line moving
average. If you are unfamiliar with what a standard deviation is you
can read about it here
As this is the case trend reversals often occur near the upper and
lower bands. As the center line is a moving average which represents
the trend in the market, it will also frequently act as support or
resistance. The first way that traders use the indicator is to
identify potential overbought and oversold places in the market.
Although some traders will take a close outside the upper or lower bands
as buy and sell signals, John Bollinger who developed the indicator
recommends that this method should only be traded with the confirmation
of other indicators. Outside of the fact that most traders would
recommend confirming signals with more than one method, with Bollinger
bands prices which stay outside or remain close to the upper or lower
band can indicate a strong trend, a situation that you do not want to be
trading reversals in. For this reason selling at the upper band and
buying at the lower is a technique that is best served in range bound
Example of Buying and Selling at the Upper and Lower Band ...
Large breakouts often occur after periods of low volatility when the
bands contract. As this is the case traders will often position for a
trend trade on a break of the upper or lower Bollinger band after a
period of contraction or low volatility. Be careful when using this
strategy as the first move is often a fake out.
newdigital, 2013.08.06 14:00
Bollinger Bands Price Action in Trending Forex Markets
Bollinger Bands indicator is used to identify and
analyze trending markets. In a trending market this indicator clearly
shows up or down direction.
This indicator can be used to determine the direction
of the forex trend. In an uptrend this indicator will clearly show the
direction of the trend, it will be heading upwards and price will be
above middle bollinger.
In a downtrend the price will be below the middle band and the bands will be heading downwards.
By observing the patterns formed by bollinger bands a trader can determine the direction in which the price is likely to move.
Patterns and Continuation Signals
Price hugs the upper band in a forex upward.
newdigital, 2013.08.06 14:02
Bollinger Bands Price Action in Ranging Forex Markets
Bollinger Bands Indicator is also used to identify
periods when a currency price is overextended. The guidelines below are
considered when applying this indicator to a sideways trend.
It is very important because it is used to give
indications that a break out may be upcoming. During a trending market
these techniques do not hold, this only holds as long as Bollinger Bands
are pointing sideways.
One of the uses of Bollinger Bands is to use the
above overbought and oversold guidelines to establish price targets
during a ranging market.
In the above ranging market the instances when the
price level hits the upper or lower bands can be used as profit targets
for long/short positions.
Trades can be opened when price hits the upper
resistance level or lower support level. A stop loss should be placed a
few pips above or below depending on the trade opened, just in case
price action breaks out of the range.
newdigital, 2013.08.06 14:04
Bollinger Bands Trend Reversals- Double Tops and Double Bottoms
A Forex trader should wait for the price to turn in
the opposite direction after touching one of the bands before
considering that a reversal is happening.
Even better one should see the price cross over the moving average.
Double Bottoms Trend Reversals
A double bottom is a buy setup/signal. It occurs
when price action penetrates the lower bollinger band then rebounds
forming the first low. then after a while another low is formed, and
this time it is above the lower band.
The second low must not be lower than the first one
and it important is that the second low does not touch or penetrate the
lower band. This bullish Forex trading setup is confirmed when the
price action moves and closes above the middle band (simple moving
Double Tops Trend Reversals
A double top is a sell setup/signal. It occurs when
price action penetrates the upper bollinger band then rebounds down
forming the first high. then after a while another high is formed, and
this time it is below the upper band.
The second high must not be higher than the first
one and it important is that the second high does not touch or penetrate
the upper band. This bearish Forex trading setup is confirmed when the
price action moves and closes below the middle band (simple moving
newdigital, 2013.08.06 14:05
Bollinger Bands Forex Trading Strategy Summary
Bollinger Bands is a popular indicator that can be used in various
ways. However, like most indicators it should not be used alone. This
indicator work best combined with overbought and oversold indicators
Since Bollinger Bands uses volatility to determine the trend,
traders should not use indicators that duplicate this information.
Instead these bands should combined with indicators that measure volume
or momentum. The table below summarizes trading strategies used with
The next lesson in my free video stock trading course which covers the implications of the pattern day trader rule and why you need $25,000 to daytrade stocks
Indicators: Relative Strength Index (RSI)
newdigital, 2013.08.07 12:55
Relative Strength Index or RSI is the
most popular indicator used in Forex trading. It is an oscillator
indicator which oscillates between 0 -100. The RSI is a trend following
indicator. It indicates the strength of the trend, values above 50 indicate a bullish trend while values below 50 indicate bearish Forex trend.
The RSI measures momentum of a currency.
The centerline for the RSI is 50,crossover of the centerline indicate shifts from bullish to bearish and vice versa.
Above 50, the buyers have greater momentum than the
sellers and price of a currency will keep going up as long as RSI stays
Below 50, the sellers have greater momentum than the
buyers and price of a currency will keep going downwards as long as RSI
stays below 50.
In the example above, when the RSI is below 50, the
price kept moving in a downward trend. The price continues to move down
as long as RSI was below 50. When the RSI moved above 50 it showed that
the momentum had changed from sell to buy and that the downtrend had
When the RSI moved to above 50 the price started to
move upwards and the trend changed from bearish to bullish. The price
continued to move upwards and the RSI remained above 50 afterwards.
From the example above, when the trend was bullish
sometimes the RSI would turn downwards but it would not go below 50,
this shows that these temporary moves are just retracements because
during all these time the price trend was generally upwards. As long as
RSI does not move to below 50 the trend remains intact. This is the
reason the 50 mark is used to demarcate the signal between bullish and
The RSI uses 14 day period as the default RSI period,
this is the period recommended by J Welles Wilders when he introduced
the RSI. Other common periods used by forex trader is the 9 and 25 day
The RSI period used depends on the time frame you are
using, if you are using day time frame the RSI 14 will represent 14
days, while if you use 1 hour the RSI 14 will represent 14 hours. For
our example we shall use 14 day moving average, but for your trading
you can substitute the day period with the time frame you are trading.
Center-line: The center-line for RSI
is 50. A value above 50 implies that a currency is in a bullish phase
as average gains are greater than average losses. Values below 50
indicate a bearish phase.
Something Interesting in Financial Video July 2013
newdigital, 2013.07.09 10:26
22. How to Trade the Relative Strength Index (RSI) Like a Pro
A lesson on how to trade the RSI for traders and investors using
technical analysis in the stock market, futures market and forex market.
In our last lesson we looked at 3 different ways that the MACD
indicator can be traded. In today's lesson we are going to look at a
class of indicators which are known as Oscillators with a look at how to
trade one of the more popular Oscillators the Relative Strength Index
An oscillator is a leading technical indicator which
fluctuates above and below a center line and normally has upper and
lower bands which indicate overbought and oversold conditions in the
market (an exception to this would be the MACD which is an Oscillator as
well). One of the most popular Oscillators outside of the MACD which
we have already gone over is the Relative Strength Index (RSI) which is
where we will start our discussion.
The RSI is best described
as an indicator which represents the momentum in a particular financial
instrument as well as when it is reaching extreme levels to the upside
(referred to as overbought) or downside (referred to as oversold) and is
therefore due for a reversal. The indicator accomplishes this through a
formula which compares the size of recent gains for a particular
financial instrument to the size of recent losses, the results of which
are plotted as a line which fluctuates between 0 and 100. Bands are
then placed at 70 which is considered an extreme level to the upside,
and 30 which is considered an extreme level to the downside.
Example of the RSI :
The first and most popular way that
traders use the RSI is to identify and potentially trade overbought and
oversold areas in the market. Because of the way the RSI is constructed
a reading of 100 would indicate zero losses in the dataset that you are
analyzing, and a reading of zero would indicate zero gains, both of
which would be a very rare occurrence. As such James Wilder who
developed the indicator chose the levels of 70 to identify overbought
conditions and 30 to identify oversold conditions. When the RSI line
trades above the 70 line this is seen by traders as a sign the market is
becoming overextended to the upside. Conversely when the market trades
below the 30 line this is seen by traders as a sign that the market is
becoming over extended to the downside. As such traders will look for
opportunities to go long when the RSI is below 30 and opportunities to
go short when it is above 70. As with all indicators however this is
best done when other parts of a trader's analysis line up with the
Example of RSI Showing Overbought and Oversold :
second way that traders look to use the RSI is to look for divergences
between the RSI and the financial instrument that they are analyzing,
particularly when these divergences occur after overbought or oversold
conditions in the market. These divergences can act as a sign that a
move is loosing momentum and often occur before reversals in the market.
As such traders will watch for divergences as a potential opportunity
to trade a reversal in the stock, futures or forex markets or to enter
in the direction of a trend on a pullback.
Example of RSI Divergence :
third way that traders look to use the RSI is to identify bullish and
bearish changes in the market by watching the RSI line for when it
crosses above or below the center line. Although traders will not
normally look to trade the crossover it can be used as confirmation for
trades based on other methods.
Forex Trading - How to Use the RSI Indicator ... ok? :)
newdigital, 2013.08.07 13:03
RSI values of above 70 are considered to be
overbought; traders consider points above the 70 level as market tops
and good points for taking profits.
RSI values of below 30 are considered to be oversold;
traders consider points below the 30 level as market bottoms and good
points for taking profits.
These levels should be confirmed by center line
crossovers. If these regions give a market top or bottom, this signal
should be confirmed with a center line crossover. This is because these
levels are prone to giving whipsaws in the market.
In the example below, when the RSI hit 70, it showed
that the currency was overbought, and this could be considered a signal
that the currency could reverse.
The currency then reversed after a short while and
started to move downwards, until it got to the oversold levels. This was
considered a market bottom after which the currency started to move
When the market is trending strongly upwards or
downwards the RSI will stay at these levels for a long time. When this
happens these regions cannot be used market tops and bottoms because
the RSI will stay at these levels for an extended period of time. This
is the reason why we say that RSI overbought and oversold regions are
prone to whipsaws and it is best to confirm the signals using
How to Use Moving Averages in Stock Trading
Indicators: Custom Moving Average
newdigital, 2013.07.31 07:53
In the example below we use 10 and 20 moving averages to generate Forex
signals; the signals generated are able to identify the trend as early
Scalper Trading Using Moving Averages
One of the most widely used method of technical analysis used to trade
price fluctuations in scalp trading is the use of moving averages.
moving averages is an indicator that provides a profitable chart
structure for scalp trader.
The idea behind moving averages is to simply enhance analysis before
taking a signal to enter the market. Planning and setting goals in the
short-term according to moving averages helps a trader to identify
interests in the market and thus trade accordingly.
Most of the targets can be established using a specific period on MA.
The moving averages determines whether the trader will scalp in a
short-term long-term. In addition, the price action above or below the
price determines the state of the market for the trading day.
If a large part of the price action is considered to be below the MA,
then bias trade/forex trend for the day is short. Most traders the use
the MA as support or resistance to determine where to enter a trade, if
price touches the MA in the direction of the forex trend a trade is then
The moving averages are plotted and the intersection point with the
price action can be used to determine the appropriate entry and exit
times in the market. Since there is always oscillation in the forex
trends and activities of the price action on the market, the price will
repeat this process of oscillating and bouncing off the MA and this can
be used to generate forex trading signals.
Scalp trader use moving averages define the price floor in an upward Forex trend and price ceiling in a downward Forex trend.
Simple moving averages are calculated and their approach is based on the
observation of price within a particular period of time using
sufficient data to calculate the moving averages is what moving average
are all about? The interpretation of the moving averages has provided
many scalp traders with lots of tips on how and when to trade a
Medium-term Trading with Moving Average
Medium term trading will use the 50 period MA.
The 50 period MA acts as support or resistance level for the price.
In an uptrend the 50 period MA will act as a support, price should
always bounce back up after touching the MA. If price closes below the
MA then it is an exit signal.
50 period MA Support
In a downtrend the 50 period MA will act as a resistance, price should
always go down after touching the moving average. If price closes above
the moving average then it is an exit signal.
50 Day Moving Average Analysis in the Forex Market
As your currency pair moves up in price, there is a key line you want to
watch. This is the 50 day moving average. If your currency pair stays
above it, that is a very good sign. If your currency pair drops below
the line in heavy volume, watch out, there could be reversal ahead.
A 50 day MA line takes 10 weeks of closing price data, and then plots
the average. The line is recalculated everyday. This will show a
currency pair's price trend. It can be up, down, or sideways.
You normally should only buy currency pairs that are above their 50 day
MA. This tells you the currency pair is trending upward in price. You
always want to trade with the trend, and not against it. Many of the
world's greatest traders, past and present, only trade or traded in the
direction of the trend.
When a successful currency pair corrects in price, which is normal, it may drop down to its 50 day MA.
Winning currency pairs normally will find support over and over again at
that line. Big trading institutions such as mutual funds, pension
funds, and hedge funds watch top currency pairs very closely. When these
big volume trading entities spot a great currency pair moving down to
its 50 day line, they see it as an opportunity, to add to, or start a
position at a reasonable price.
What does it mean if your currency pair price slices downward through
its 50 day line. If it happens on heavy volume, it is a strong signal to
sell the currency pair. This means big institutions are selling their
shares, and that can cause a dramatic drop in price, even if
fundamentals still look solid. Now, if your currency pair drops slightly
below the 50 day line on light volume, watch how the currency pair acts
in the following days, and take appropriate action if necessary
Long-term Trading with Moving Average
Long term trading will use long period moving averages such as the 100 and 200 moving average.
These moving averages act as long term support and resistance levels.
Since many traders use the 100 and 200 moving averages price will often
react to these support and resistance levels.
Learn about the 200 day MA
In Forex Trading, investors can use both fundamental analysis and
technical analysis to help determine whether a currency pair is a good
buy or sell.
In technical analysis technique traders looking to gauge supply and
demand for a currency use the 200 day moving average to examine data in
Traders are most familiar with the basic analysis of MA. The 200 day
moving average is used to plot the long term support or resistance
level. If price is above 200 day MA then price is bullish, and if it is
below then it is bearish.
One of the ways to measure supply and demand is to calculate the average
closing price over the last 200 trading sessions. this accounts for
each day going back in time and shows how this 200 day average has moved
hence the term 200 day MA.
The reason why the average 200 day MA in particular is so popular in
technical analysis is because historically has been used with profitable
results for trading in the forex market. A popular timing strategy is
used to buy when price action is above its moving average of 200 days
and sell when it goes below it.
With individual currency pairs, investors can benefit from being
notified when a currency pair rises above, or falls below its 200 day
Moving Average and then use fundamental analysis to help determine if
the signal is an opportunity to go long or short.
This video is on how to use multiple moving averages to give structure to the market.
How to Start with Metatrader 5
newdigital, 2013.07.15 21:19
Just good indicator found in Metatrader 5 CodeBase : GUPPY MULTIPLE MOVING AVERAGES :
These are two groups of exponential moving averages. The short term
group is a 3, 5, 8, 10, 12 and 15 day moving averages. This is a proxy
for the behaviour of short term traders and speculators in the market.
The long term group is made up of 30, 35, 40, 45, 50 and 60 day moving
averages. This is a proxy for the long term investors in the market.
The relationship within each of these groups tells us when there is
agreement on value - when they are close together - and when there is
disagreement on value - when they are well spaced apart.
The relationship between the two groups tells the trader about the
strength of the market action. A change in price direction that is well
supported by both short and long term investors signals a strong trading
opportunity. The crossover of the two groups of moving averages is not
as important as the relationship between them.
When both groups compress at the same time it alerts the trader to
increased price volatility and the potential for good trading
The Guppy Multiple Moving Average (GMMA) is an indicator that tracks the
inferred activity of the two major groups in the market. These are
investors and traders. Traders are always probing for a change in the
trend. In a downtrend they will take a trade in anticipation of a new up
trend developing. If it does not develop, then they get out of the
trade quickly. If the trend does change, then they stay with the trade,
but continue to use a short term management approach. No matter how long
the up trend remains in place, the trader is always alert for a
potential trend change. Often they use a volatility based indicator like
the count back line, or a short term 10 day moving average, to help
identify the exit conditions. The traders focus is on not losing money.
This means he avoids losing trading capital when the trade first starts,
and later he avoids losing too much of open profits as the trade moves
We track their inferred activity by using a group of short term moving
averages. These are 3, 5, 8, 10, 12 and 15 day exponentially calculated
moving averages. We select this combination because three days is about
half a trading week. Five days is one trading week. Eight days is about
a week and a half.
The traders always lead the change in trend. Their buying pushes prices
up in anticipation of a trend change. The only way the trend can
survive is if other buyers also come into the market. Strong trends are
supported by long term investors. These are the true gamblers in the
market because they tend to have a great deal of faith in their
analysis. They just know they are right, and it takes a lot to convince
them otherwise. When they buy a stock they invest money, their
emotions, their reputation and their ego. They simply do not like to
admit to a mistake. This may sound overstated, but think for a moment
about your investment in AMP or TLS. If purchased several years ago
these are both losing investments yet they remain in many portfolios and
perhaps in yours.
The investor takes more time to recognize the change in a trend. He
follows the lead set by traders. We track the investors inferred
activity by using a 30, 35, 40, 45, 50 and 60 day exponentially
calculated moving average. Each average is increased by one week. We
jump two weeks from 50 to 60 days in the final series because we
originally used the 60 day average as a check point.
This reflects the original development of this indicator where our focus
was on the way a moving average crossover delivered information about
agreement on value and price over multiple time frames. Over the years
we have moved beyond this interpretation and application of the
indicator. In the notes over the coming weeks we will show how this has
Our starting point was the lag that existed between the time of a
genuine trend break and the time that a moving average cross over entry
signal was generated. Our focus was on the change from a downtrend to
an up trend. Our preferred early warning tool was the straight edge
trend line which is simple to use and quite accurate. The problem with
using a single straight edge trend line was that some breakouts were
false. The straight edge trend line provided no way to separate the
false from the genuine.
On the other hand, the moving average crossover based on a 10 and 30 day
calculation, provided a higher level of certainty that the trend break
was genuine. However the disadvantage was that the crossover signal
might come many days after the initial trend break signal. This time lag
was further extended because the signal was based on end of day prices.
We see the exact cross over today, and if we were courageous, we could
enter tomorrow. Generally traders waited for another day to verify that
the crossover had actually taken place which delayed the entry until 2
days after the actual crossover. This time lag meant that price had
often moved up considerably by the time the trade was opened.
The standard solution called for a combination of short term moving
averages to move the crossover point further back in time so that it was
closer to the breakout signaled by a close above the straight edge
trend line. The drawback was that the shorter the moving average, the
less reliable it became. In plotting multiple moving averages on a
single chart display four significant features emerged.
These broad relationships, and the more advanced relationships used with
the GMMA are summarized in the chart. Over the following series of
articles we will examine the identification and application of each of
This is the most straightforward application of the GMMA and it worked
well with “V’ shaped trend changes. It was not about taking the lag out
of the moving average calculation. It is about validating a prior trend
break signal by examining the relationship between price and value. Once
the initial trend break signal is validated by the GMMA the trader is
able to enter a breakout trade with a higher level of confidence.
The CBA chart shows the classic application of the GMMA. We start with
the breakout above the straight edge trend line. The vertical line shows
the decision point on the day of the breakout. We need to be sure that
this breakout is for real and likely to continue upwards. After several
months in a downtrend the initial breakout sometimes fails and develops
as shown by the thick black line. This signals a change in the nature of
the trend line from a resistance function prior to the breakout to a
support function after the breakout.
The GMMA is used to assess the probability that the trend break shown by
the straight edge trend line is genuine. We start by observing the
activity of the short term group. This tells us how traders are
thinking. In area A we see a compression of the averages. This suggests
that traders have reached an agreement on price and value. The price of
CBA has been driven so low that many traders now believe it is worth
more than the current traded price. The only way they can take advantage
of this ‘cheap’ price is to buy stock. Unfortunately many other short
term traders have reached the same conclusion. They also want to buy at
this price. A bidding war erupts. Traders who believe they are missing
out on the opportunity outbid their competitors to ensure they get a
position in the stock at favorable prices.
The compression of these averages shows agreement about price and value.
The expansion of the group shows that traders are excited about the
future prospects of increased value even though prices are still rising.
These traders buy in anticipation of a trend change. They are probing
for a trend change.
We use the straight edge trend line to signal an increased probability
of a trend change. When this signal is generated we observe this change
in direction and separation in the short term group of averages. We know
traders believe this stock has a future. We want confirmation that the
long term investors are also buying this confidence.
The long term group of averages, at the decision point, is showing signs
of compression and the beginning of a change in direction. Notice how
quickly the compression starts and the decisive change in direction.
This is despite the longest average of 60 days which we would normally
expect to lag well behind any trend change. This compression in the long
term group is evidence of the synchronicity relationship that makes the
GMMA so useful.
This compression and change in direction tells us that there is an
increased probability that the change in trend direction is for real –
it is sustainable. This encourages us to buy the stock soon after the
decision point shown.
The GMMA picks up a seismic shift in the markets sentiment as it
happens, even though we are using a 60 day moving average.. Later we
will look at how this indicator is used to develop reliable advance
signals of this change. This compression and eventual crossover within
the long term group takes place in area B. The trend change is
confirmed. The agreement amongst investors about price and value cannot
last. Where there is agreement some people see opportunity. There are
many investors who will have missed out on joining the trend change
prior to area B. Now the change is confirmed they want to get part of
the action. Generally investors move larger funds than traders. Their
activity in the market has a larger impact.
The latecomers can only buy stock if they outbid their competitors. The
stronger the initial trend, the more pressure there is to get an early
position. This increased bidding supports the trend. This is shown by
the way the long term group continue to move up, and by the way the long
term group of averages separates. The wider the spread the more
powerful the underlying trend.
Even the traders retain faith in this tend change. The sell off that
takes place in area C is not very strong. The group of short term
averages dips towards the long term group and then bounces away quickly.
The long term group of averages show that investors take this
opportunity to buy stock at temporarily wakened prices. Although the
long term group falters out at this point, the degree of separation
remains relatively constant and this confirms the strength of the
The temporary collapse of the short term group comes after a 12%
appreciation in price. Short term traders exit the trade taking short
term profits at this level of return and this is reflected by the
compression and collapse of the short term group of averages. As long
term investors step into the market and buy CBA at these weakened
prices, traders sense that the trend is well supported. Their activity
takes off, and the short term group of averages rebounds, separates, and
then run parallel to the long term group as the trend continues.
The GMMA identifies a significant change in the markets opinion about
CBA. The compression of the short term and long term groups validates
the trend break signal generated by a close above the straight edge
trend line. Using this basic application of the GMMA, the trader has the
confidence necessary to buy CBA at, or just after the decision points
shown on the chart extract.
Using this straightforward application of the GMMA also kept traders out
of false breakouts. The straight edge trend line provides the first
indication that a downtrend may be turning to an up trend. The CSL chart
shows two examples of a false break from a straight edge trend line. We
start with decision point A. The steep downtrend is clearly broken by a
close above the trend line. If this is a genuine trend break then we
have the opportunity to get in early well before any moving average
This trend break collapses quickly. If we had first observed this chart
near decision point B then we may have chosen to plot the second trend
line as shown. This plot takes advantage of the information on the
chart. We know the first break was false, and by taking this into
account we set the second trend line plot. Can this trend break be
relied upon? If we are right we get to ride a new up trend. If we are
wrong we stand to lose money if we stay with a continuation of the
downtrend. The straight edge trend line by itself does not provide
enough information to make a good decision.
When we apply the GMMA we get a getter idea of the probability of the
trend line break actually being the start of a new up trend. The key
relationship is the level of separation in the long term group of
averages, and trend direction they are traveling. At both decision point
A and decision point B the long term group is well separated.
Investors do not like this stock. Every time there is a rise in prices
they take advantage of this to sell. Their selling overwhelms the market
and drives prices down so the downtrend continues.
The degree of separation between the two groups of moving averages also
makes it more difficult for either of the rallies to successfully change
the direction of the trend. The most likely outcome is a weak rally
followed by a collapse and continuation of the down trend. This
observation keeps the trader, and the investor, out of CSL.
Looking forward we do see a convergence between the short term group of
averages and the long term group of averages. Additionally the long term
group begins to narrow down, suggesting a developing level of
agreement about price and value amongst investors in April and May. In
late March the 10 day moving average closes above the 30 day moving
average, generating a classic moving average buy signal.
we can use GMMA indicator for Multiple MA : GMMA indicator from MT5 CodeBase is here :
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