What Is the Moving Average Bounce Trading System?
The moving average bounce trading system uses a short-term timeframe and a single exponential moving average. A trader watches for certain occurrences on a trading chart, then trades the instrument as it moves away from, reverses, and then bounces off of the moving average line.
Using a moving average works by removing short-term fluctuations from a chart line, demonstrating the overall direction and trend of an investment. This creates a smoother appearing price line. When the price experiences a strong move, the line will have a tendency to track back to the moving average, but then continue the original direction it was moving—it is this bounce that is used by the moving average bounce trading system.
The default trade uses a 1- to 5-minute Open, High, Low, and Close (OHLC) bar chart and a 34 bar exponential moving average of the typical price (High, Low, and Close, or HLC). 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 e.g., the European market open (8:00 AM Central European Time), the U.S. market open (9:30 AM ET).
This method can and should be used, exactly as presented, in whichever markets you are trading. The trade used in the tutorial is a long trade, using one contract, a target of 10 ticks, and a stop-loss of five ticks. The target and stop-loss are options chosen by the trader and their level of comfort for the options they are trading.
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 this example, the distance is approximately 10 ticks.
Wait for Price and Moving Average to Touch
You want 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 some traders use at least 3 bars. In this chart, the price touches the moving average on the fourth bar to make a consecutive lower low.
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. For entries into a long trade, follow these steps:
- Price bars make lower lows
- Price bar touches the moving average
- Subsequent price bar fails to make a new low
- Subsequent price bar breaks the high of the previous price bar
If you are going to enter a short trade:
- Price bars make higher highs
- Price bar touches the moving average
- Subsequent price bar fails to make a new high
- Subsequent price bar breaks the low of the previous price bar
In the trade shown in this chart, the bar that failed to make a new low is shown in white, and the entry is shown by the arrow. The entry would be 1.2995, with a target of 1.3005, and a stop loss of 1.2990 (ticks of 10 and five).
There is no default order type for the moving average bounce trade entry, but for some markets traders recommend 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 most markets, the minimum should be a limit order for the target and a stop order for the stop loss.
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.
Repeat the Trade
Repeat the trade from step four, as many times as necessary, until either your daily profit target is reached, or your market is no longer active.