Different approaches to trading work for different traders. You do not have to learn them all, however, it might be a good idea to know some of them and then make a decision about which one is your favourite. Moreover, not always the more complicated system the better. Sometimes one indicator is enough to create a powerful strategy. And so in today’s method, you will just need one moving average to add to your chart. Let’s see how it works.
Key Takeaways🔑
| →Different trading approaches work for different traders. |
| →Using a simple strategy with one indicator can be effective. |
| →Practice and risk management are important for successful trading. |
Contents
Moving average bounces
The price of an underlying asset moves constantly up and down. Nevertheless, it is usually possible to mark the range within which it fluctuates.
In the moving average bounces method, a trader follows the movements of the prices when they go beyond the moving average line, return and bounce. This observation helps to identify trading opportunities to buy or to sell.
An Exponential Moving Average is used in this technique, as it puts more attention to the latest price behaviour.
Setting up the chart
Log in to your Olymp Trade trading account and choose the asset. Set the chart type and timeframe. The candlesticks period should be somewhere between 1 and 5 minutes. Then, click on the indicators icon and search for the Exponential Moving Average (EMA). It will be added to your chart.
Now, you should adjust the settings, so the method works well on all the asset classes. Set the period of the EMA at 34. Later on, you can experiment with different periods. A general rule is that when you increase the EMA period, the line of the indicator will look smoother.
There is also a possibility to change the colour and the width of the indicator line. Do so if it makes the readings easier for you.
Trading with the bounces from moving average
There are a few things you should focus on when opening transactions.
Opening long trades
Today’s approach follows the trend. It means that you should look for opportunities to open a long trade during the upward movement. This is the first thing, identify the uptrend. It can be done by observing when the price is moving above and further away from the EMA.
The next step is to wait for the price to change direction and to near the indicator’s line. It may even go a bit below the EMA.
A signal to open a long position is received when the price does not make the next lower low, but instead bounces from the indicator and continues upward movement.
Opening short positions
The first thing is to recognise the downtrend. You will do that by observing the prices in relation to the EMA line. The candlesticks should form below the EMA and move further away from it.
The second step is to notice when the price reverses. New higher highs are created and the price touches or even crosses the Exponential Moving Average.
The moment to enter a short trade occurs when the price fails to make a higher high, breaks the indicator line, reverses and moves downwards.
Pros and Cons of the Moving Average Bounces Method 😃😔
Pros:
- Simple and easy-to-understand strategy
- Can be effective in identifying trading opportunities
- Works well for short-term traders
Cons:
- False signals may occur, requiring proper risk management
- May not work well in all market conditions
- Requires practice and experience to use effectively
| Steps | Benefits |
|---|---|
| Identify the trend and observe price movements in relation to the Exponential Moving Average (EMA). | Helps to determine entry and exit points for trades. |
| Wait for the price to change direction and approach the EMA. | Provides confirmation of potential trading opportunities. |
| Enter a long trade when the price bounces from the EMA in an uptrend. | Allows for capitalizing on upward price movements. |
| Enter a short trade when the price fails to make a higher high and reverses in a downtrend. | Enables profiting from downward price movements. |
Summary
Moving average bounces method requires adding just one indicator to the chart. This is the Exponential Moving Average with a period of 34. The timeframe of the chart should be set between 1 and 5 minutes what makes the approach good for short-term traders.
No method is perfect and although moving average bounces are commonly utilised by both, novice and experienced traders, false signals may occur. Prepare a strong risk management plan and practice before investing real money. Olymp Trade demo account would be a fantastic place to do it. It is free of charge and supplied with virtual cash that can be replenished at any time. Use it whenever you need to.
Good luck!
Frequently Asked Questions about the Moving Average Bounces Method 🧐
- Q: What is the Moving Average Bounces method?
- A: The Moving Average Bounces method is a trading strategy that involves following price movements when they go beyond an Exponential Moving Average (EMA) line and bounce back.
- Q: How do I set up the Moving Average Bounces method?
- A: To set up the Moving Average Bounces method, log in to your trading account, choose an asset, set the chart type and timeframe, and add an EMA indicator with a period of 34.
- Q: When should I enter a long trade using this method?
- A: You should enter a long trade when the price is in an uptrend, moves above and away from the EMA, reverses, and bounces from the indicator line without making a lower low.
- Q: When should I enter a short trade using this method?
- A: You should enter a short trade when the price is in a downtrend, forms candlesticks below the EMA, reverses, breaks the indicator line, and moves downward without making a higher high.
- Q: Are there any risks or limitations to be aware of?
- A: False signals can occur with this method, so proper risk management is important. Additionally, market conditions may affect its effectiveness, and it requires practice and experience to use it effectively.