Trading the ‘Bounce’ using moving averages

There are four types of trader. The first type trades on guesses. They often suffer horrible losses in the first month and give up prematurely. The second type trades on fundamental analysis. They monitor the economic calendar and stand ready for breaking news that drastically affects the markets. The third type of trader uses analytics. They use the tools found on the MetaTrader 4 (and recently MT5) trading platform. They monitor trends and track changes. The fourth type uses analytics together with breaking news releases.

The fourth strategy should be the goal of every serious trader aiming to make significant financial gains, and this article will get you on that track sooner rather than later.

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Lines that really matter

Whenever you see a trader’s  MT4 trading platform, you’ll often see colourful lines that traders lay over their charts. These are tools or indicators to help technical analysis. One such tool used by practically every professional trader is the moving averages (MA). As the name suggests, a moving average “line” shows the average price movement over the course of the time frame.  The most common periods are the 50, 100 and 200 -day, but larger and smaller time frames are also widely employed.

There are as many uses of MA’s as there are trading strategies, but one of the most common and useful applications, especially in the Forex market, is to use MAs as areas of ‘dynamic support and resistance’.

Dynamic support and resistance

Dynamic support and resistance refers to how the MAs act as a hard ‘floor’ and/or ‘ceiling’ to price ranges, capping gains or losses within boundaries or parameters.  The monthly chart of EURUSD below provides a good example of how MAs act in this fashion.

A classic scissor-blade indication of a coming bounce.

The EURUSDchart above shows how the 200-month and 50-month MA’s form a neat ‘scissor-blade’ pattern. The 200 (green) first provided a ceiling for prices in January, February and March 2018, and then after the exchange rate pulled-back and fell, the 50-month provided a floor (red) for May, June, August and October too.

The 2012 bounce happened when bearish momentum was weak and converging bullishly with price action.

Earlier in the exchange rates history, the 200 MA also provided a hard floor for two major bounces in 2010 and 2012, as shown and circled in grey on the top of the chart above. It is in the anticipation of this quality of MAs to resist or support prices that traders can gain an edge. If they know prices will be rebuffed by the MA – especially on first touch – this offers a trading opportunity to ‘go long or short’ at the level of the MA.

Trading Tips

Sometimes MAs get broken by prices, however, as happened twice in 2014 for EURUSD. If you would have traded the MA’s as areas of support and resistance on these occasions, you would have lost money. The next question is, how can a trader distinguish between the touches which result in a bounce and those which don’t?

Crossing the line

When the period of first touch closes near the MA, as happened on the first occasion in 2014, it is often a sign it will break. A clear break below or above the MA on a closing basis, as happened the second time in 2014, is an even stronger sign that the MA has been breached.

Breaks are also more likely to happen when the market is moving rapidly due to dramatic or surprising fundamentals. When the market is in the grip of a major economic calendar release, technical resistance is overrun in the panic or euphoria caused by changing fundamentals occurs. Whenever this happens, traders using MAs who are following the trend can make a killing in a relatively short time.

The threshold of action

It is, perhaps, useful to think of MAs as strongholds, and prices as besieging armies. The very first assault is unlikely to overrun a castle unless it is extremely strong and powerful. But over time the walls can be battered down by repeated attempts. MAs should be the go-to tool for every trader who uses fundamentals to influence trading choices.

MAs are easily accessible from the MT4 platform, which can be downloaded for free. Exness also offer a demo account for their clients to make the learning curve fast and free. Once you’ve set a few MAs and seen the results of your forecasts, you’ll be ready to join the thousands of Exness traders enjoying safe and unrestricted access to the world’s most popular trading market.

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This article is a marketing communication and does not constitute investment advice or research. Its content represents the general views of our experts and does not consider individual readers’ personal circumstances, investment experience, or current financial situation. This article is not prepared in accordance with legal requirements promoting independent investment research, and Exness is not subject to any prohibition on dealing before the release of the Analytics. Readers should consider the possibility that they may incur losses. Therefore, Exness is not liable for any losses incurred due to the use of its articles.