Another (similar, closely related, only slightly different) method is to do essentially the same thing, but waiting for the market to go back above the gap again, after the dip into it, before entering long. Fewer trades, higher win-rate, not necessarily more profit. It's an intelligent and realistic way of using indicators to assist you in "buying the dips in an uptrend" (and vice-versa for short positions, of course). (It's also notable for being far more sensible, practicable and reasonable than the ways that many people are trying to use moving averages, by entering trades on the basis of their crossovers!).
This is a SMA comparison to a pan cooking eggs, it be really difficult to cook more than one egg, so you are limited to what you can do, but at least if you burn it, only one egg is at a LOSS. EXPERIENCE is everything like the size of the pan for cooking eggs. When you know what you are doing well, concentrate on loss being low, then you can increase number of the eggs you plan to feast on having. As in any indicator, fundamental news or charts, if you don't have the knowledge, you will get BURNED.
Here is a simple MA system for you all to backtest. Just follow the slope of the curve. Create three MAs. MA1 use coefficients [1,2,3,2,1] divided by 9 of course so it sums to unity, and center it on data point three of price. MA2 use coefficients [1,2,2,1], divided by 6 of course, and centered on data point three of price. MA3, here you use your favorite low-lag MA of price, but not centered. Plot MA1 against price. You will notice it is a true zero-lag MA with fairly decent attenuation, but the last two data points are bogus, throw them out. Add the next-to-last value of MA2 to the next to last value of MA1, because the last value of MA2 is bogus. Add the last value of MA3 to the last value of MA1. Backtest and let us all know if you think you could make money following the curve of MA1 with the added values of MA2 and MA3.
ENTRY: one entry requirement is that there should be a good gap between the short term ma [3 ma 8 ma] and the longer term ma [ 50 ma 100 ma 200 ma] this show that the short term momentum is higher than the longer term momentum. this requirement was satisfied by eurusd chart [see below] at the arrow and a long entry was made.
The market went up in a big up bar-the biggest in the present up swing. this biggest bar is more likely to be a measuring gap than an exhaustion gap:After the big bar there was a small up bar where the arrow was placed; that a small up bar was printed instead of a down bar means that it is likely that the big bar was a measuring gap and a equal move up may be likely
trade closed because the marked bar with the arrow failed to continue although the first pullback will usually be bought.
Thanks as usual a very good and intelligent reply Also this technique may be learnt in an hour or less compared to the mastering of price action.
the market went down in two bars below the 3ma and the 8 ma. No attempt was made to buy the dip;i decided to wait, as Xela suggested, for the market to go back up above the two short term ma. Why? two reasons 1. the market dipped rather slowly in two down bars rather than a rapid single down bar:i would have entered immediately, if that had happened. 2. the gap between the short term moving averages and the 50 ma was very large hinting that the up move had gone too fast
this what happened. be alert to what information the market is giving. i hope this illustrates that trading is not only about following indicators or price action or rules but understanding the language of the markets and giving her the due attention and respect, she deserves.
got an invitation from the market to enter, to chase but declined because i believe the correction may not be over. the market will sometimes do unexpected things but she is always gracious enough to pamper traders with a second invitation or entry