Moving Average Bounce

1
Introduction

Reflection of stock market graph in window
Moving Average Bounce Tutorial. Hiroshi Watanabe / Getty Images

The moving average bounce trading system uses a short term timeframe and a single exponential moving average and trades the price moving away from, reversing, and then bouncing off of the moving average.

Moving averages smooth the price, so that short term fluctuations are removed, and the overall direction is shown. When the price experiences a strong move, it will have a tendency to retrace back to the moving average, but then continue the original move, and it is this bounce that is used by the moving average bounce trading system.

The default trade uses a 1 to 5 minute OHLC (Open, High, Low, and Close) bar chart, and a 34 bar exponential moving average of the typical price (HLC average). Both the chart timeframe and the exponential moving average length can be adjusted to suit different markets. The default trading time is when the market is most active, such as the European open which happens at 8:00 AM Central European Time or the US open which happens at 9:30 AM Eastern Time, or at 3:30 PM Central European Time.

The following tutorial steps use the EUR futures market, but exactly the same steps should be used in whichever markets you are trading with this trade. The trade used in the tutorial is a long trade, using 1 contract, with a target of 10 ticks, and a stop loss of 5 ticks.

2
Open a Chart

Moving Average Bounce Chart
Open a Chart.

Open a 1 minute OHLC (Open, High, Low, and Close) bar chart of your market.

3
Add an Exponential Moving Average

Moving Average Bounce Chart
Add an Exponential Moving Average.

Add a 34 bar exponential moving average of the HLC typical price (calculated as (High + Low + Close) / 3), which is also known as the HLC average.

4
Wait for Price and Moving Average Divergence

Moving Average Bounce Chart
Wait for Price and Moving Average Divergence.

Watch the market, and wait until the price has moved away from the moving average. There is no default distance the price should move, but the price bars should no longer be touching the moving average. For the EUR the recommendation is approximately 10 ticks.

5
Wait for Price and Moving Average Convergence

Moving Average Bounce Chart
Wait for Price and Moving Average Convergence.

Wait for the price to reverse, and move back towards the moving average.

6
Wait for Price and Moving Average to Touch

Moving Average Bounce Chart
Wait for Price and Moving Average to Touch.

Wait for the price to touch the moving average, which happens when the price trades at the current moving average price.

For a long trade, the previous price bars should have been making lower lows as the price approached the moving average, and for a short trade, the previous price bars should have been making higher highs as the price approached the moving average. There is no specific number of bars that need to make consecutive lower lows or higher highs, but I recommend at least 3 bars.

In the chart shown below, the price touches the moving average on the fourth bar to make a consecutive lower low.

7
Enter your Trade

Moving Average Bounce Chart
Enter your Trade.

Enter your trade when the high (or low) of the first price bar that fails to make a new low (or high) is broken. The following list shows the steps required for both long and short entries :

Long Trade

  1. Price bars make lower lows
  2. Price bar touches the moving average
  3. Subsequent price bar fails to make a new low
  4. Subsequent price bar breaks the high of the previous price bar

Short Trade

  1. Price bars make higher highs
  2. Price bar touches the moving average
  3. Subsequent price bar fails to make a new high
  4. Subsequent price bar breaks the low of the previous price bar

In the trade shown in the chart below, the bar that failed to make a new low is shown in white, and the entry is shown by the arrow. The entry is at 1.2995, with a target of 1.3005, and a stop loss of 1.2990.

There is no default order type for the moving average bounce trade entry, but for the EUR the recommendation is a limit order.

As soon as your entry order has been filled, make sure that your trading software has placed your target and stop loss orders, or place them manually if necessary. There is no default order type for either the target or stop loss, but for the EUR (and usually for all markets), the recommendation is a limit order for the target and a stop order for the stop loss.

8
Wait for your Trade to Exit

Moving Average Bounce Chart
Wait for your Trade to Exit.

Wait for the price to trade at your target or at your stop loss, and for either your target or stop loss order to get filled. The moving average bounce trade can take anywhere from a few minutes to a couple of hours to reach your target or stop loss, and the trade does not use any target or stop loss adjustments (except moving the stop loss to break even at a suitable time).

The targets that are shown on the chart are at 1.3005 (10 ticks), 1.3015 (20 ticks), and 1.3025 (30 ticks), all of which were filled by this trade.

If your target order has been filled, then your trade has been a winning trade. If your stop loss order has been filled, then your trade has been a losing trade.

9
Repeat the Trade

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Moving Average Bounce Tutorial. Thomas Jackson / Getty Images

Repeat the trade from step 4, as many times as necessary, until either your daily profit target is reached, or your market is no longer active.