 Now, we have the big picture of the market and we at least know that a LONG trade is not as risky as a SHORT trade. However, a short term trader needs a short term signal to enter the market. A short term LONG signal would identify when: - The 144 EMA crossed the 200 SMA on 4H chart; - The price must be above the 200 SMA; - The MAs is diverging;  Velocity of market with moving averagesWhen a market is in an uptrend the shorter moving average tends to diverge quickly from the longer moving average and this makes the distance between two moving averages looks wider. This phenomenon indicates that the momentum (velocity of the price) of the price is rising. Otherwise, when two moving averages are converging after they diverged once earlier (Where we took the LONG trade), the price tends to pull back and this means the momentum of the market is slowing, so the LONG trade is about to be invalid and we must exit the market. Furthermore, two moving averages are on their way to cross over again but this time shorter moving average cross the longer moving average in opposite direction (Downward). The downward cross over of two moving averages gives us very valuable information in which the momentum has slowed into levels that the price can not rely on it anymore. A very weak momentum would means that the market is going to be lazy (Consolidation) so we must avoid this situation and wait till a new clear signal tell us what to do next.  Pratical setting of moving averages: short term scale: fast: (6, 13) periods, close (EMA and SMA), triple moving averages 9, 10, 13, 18, 20 and 21 (periods), 40, 55 and 89 periods for medium term scale, 100, 144, 200 for long term scale. EMA=Exponetial moving averages. SMA=Simple moving averages. |
