#3 Range-bound trading (34 EMA + 5 EMA)
Submitted by Edward Revy on December 17, 2009 - 17:56.
Many systems start with words: "I’ve been observing charts for a while, and suddenly an idea popped up in my head". Same was with this one for me. I’ve been looking at charts, in particular at moving averages, and came up with a trading plan to foresee upcoming ranging markets.
This is the earliest detection of a ranging market known to me, and I’d like to share it with you today.
On any time frame we need two Moving averages: 34 EMA and 5 EMA.
After both moving averages have been trading apart for a while = the market was trending, start watching for the first candlestick to touch both moving averages (body + shadows, everything counts). Here is our first candidate on the screen shot below:
This is the first earliest sign that a sideways pattern might be forming. I used words "might be" because we don’t know what’s in for us ahead. But let's go step by step. Below is what you’ll be actually seeing in real time:
Our next step is to look behind that candlestick and identify the closest swing high and low. Both those swings should be outside the reference candle body length, including shadows. Reference candle is the one I’ve circled in blue.
Once we've found both swings, draw horizontal lines thought them as shown on the screen shot below:
That’s your anticipated range area ahead. As long as price stays inside that area, you can treat it as a range-bound move.
Let’s now have a look what were the actual results:
Price holds inside the predicted range! Pretty good forecast, isn’t it?
(By the way I left MACD on the charts just for the reference to the method I’ve described earlier in range-bound trading #2)
But that’s not all. We can go further and each time a new candle touches both Moving averages, we are free to reset our range boundaries to new highs and lows using the same old rules. Range boundaries can go up and down during each new re-set, it is fine.
You can now trade breakouts out of those ranges, or wait till there is a new trend to be traded.
When re-setting, keep the boundaries of the very first range for the reference, when price finally breaks that level – that’s a significant achievement, and a new chapter for a new trend.