01 Nov Pattern hunting — moving averages

First­ly, I am going to look at the 4‑hourly chart over a time peri­od extend­ing beyond a year. The prin­ci­ple of using mov­ing aver­ages is that you take 3 dif­fer­ent mov­ing aver­ages and see if you can find a trend. This will hope­ful­ly help with com­ing up with a trad­ing strat­e­gy. For my first ‘test’ I am using the 20 peri­od, 50 peri­od, and 200 peri­od sim­ple mov­ing aver­age. There are dif­fer­ent mov­ing aver­ages like sim­ple and expo­nen­tial etc. If you don’t know what these are you can GOOGLE them and most like­ly you haven’t real­ly tried learn­ing much about trad­ing and are look­ing for oth­ers to tell you the ‘holy grail’. Stop slack­ing bro/sis and go get your share in the world. 

DISCLAIMER

Click here for my dis­claimer. It basi­cal­ly says that I am on my path to becom­ing a trad­er and these are just my opin­ions on how to approach learn­ing to trade. Feel free to check it out and com­ment on it.

Here it goes…

Sim­ple mov­ing averages

So I have plot­ted the green 20, the blue 50, and the gold 200 SMA and what I am going to look for is a cross over or under the big­ger mov­ing aver­ages. Idea is that when the 20SMA is over the 50SMA, AND over the 200SMA, that’s a very bull­ish trend and one should go long. Now let’s see if we can find some patterns. 

As you can see I have cir­cled the cross over and unders and I’ll be hav­ing a look at them from the left to the right. 

No. 1

The first one we can see that both the 20 and 50 were under the 200 SMA. Then the 20 crossed over the 50, then they both crossed the 200 sig­nal­ing a bull­ish trend. After which prices indeed went up for a while. Then the 20 start­ed touch­ing the 50 that could be indi­cat­ing loss of momen­tum and final­ly cross­ing under the 50. Then it stayed under the 50 until they both crossed the 200. 

Les­son

When the 20 cross­es the 50 and then they both cross the 200 I should only go long to not hav­ing to deal with prices get­ting away with me on a posi­tion I took in the wrong direc­tion. How­ev­er, this is just the first one so let’s look at some more.

No. 2.

After its decline they both sharply crossed the 200. Just before it did though we can see there was a ‘stut­ter’ and then it con­tin­ued its way down. This is more of a drop then oth­ers we’ll see lat­er. At the bot­tom we can see anoth­er point where the 20 touch­es the 50 before in the end it cross­es it. Again a loss of momen­tum in my opinion.

Les­son

When the 20 and 50 are far away from the 200 and the 20 cross­es down under the 50 we can expect a move towards the 200. Then when they both break the 200 we can see a sig­nif­i­cant move down. When there’s a big momen­tum push behind the move the 20 will touch the 50 before cross­ing it indi­cat­ing a reversal. 

No. 3

Here we can see that the 20 crossed the 200 but the 50 hadn’t yet. So after the 20 cross­ing the 200 it pret­ty much imme­di­ate­ly went back down to meet with the 50. After which the 50 caught up and they both crossed the 200 sig­nal­ing anoth­er bull run. On this run we can see that the 20 is touch­ing the 50 sev­er­al times but is stay­ing on the bull side of it until it actu­al­ly breaks it in the first week of January. 

Les­son

Both the 20 and 50 have to cross the 200 before indi­cat­ing a valid trend bull or bear. 

No. 4

This one seems sig­nif­i­cant because of the fact that it looks like a peri­od of just con­sol­i­da­tion. The 20 hov­ered over the 50 and the 50 over the 200. Some­times the 20 would cross the 50 but not the 200. Only at one point did the 20 cross the 200 but again not the 50 so no real rever­sal could be indi­cat­ed. Then they both broke the 200 at the same time and sig­naled in a bear­ish move. 

Les­son

It looks like prices overex­tend­ed and tried to go to new lev­els but the 200 seems to pull prices back to its mean. If prices stay over the 200 and there’s no dis­cernible trend than we should assume that prices are con­sol­i­dat­ing at this lev­el indi­cat­ing a new peri­od of a big trend. 

No. 5, 6, 7

Sim­i­lar to no. 1 and 2.

No. 8

This is anoth­er inter­est­ing one. We can see that after the 20 and 50 have dipped and overex­tend­ed as opposed to the 200 then to see them return. The 20 touch­es the 200 and returns to the 50 who is try­ing to play catch up. THe 20 breaks the 50 cir­cles back up and both the 20 and 50 cross the 200 at about the same time. 

Les­son

After this move we have seen a bull­ish trend evolve so could this be the indi­ca­tor for just that? A true rever­sal in trend. Almost a sim­i­lar break at no. 4 hap­pened but not as close­ly tied. This could how­ev­er be because of the con­sol­i­da­tion peri­od pri­or to it. Anoth­er thought is that because mov­ing aver­ages are lag­ging indi­ca­tors (mean­ing they are late to the ‘par­ty’) so this occur­rence could just be because at that point we are turn­ing in a new direc­tion. But then when we look at num­ber 9 we seen a sim­i­lar thing. 

No. 9

Could this be con­sid­ered a con­fir­ma­tion of num­ber 8 indi­cat­ing the rever­sal of the trend actu­al­ly con­firmed. BEcause here the mov­ing aver­ages are very close indeed as well. Or could it be that after hav­ing a few ‘drop­ping’ cross over and unders that when the cross­es become tight we can see a reversal? 

Les­son overall

I think it is very inter­est­ing to see how mov­ing aver­ages behave. These are the mov­ing aver­ages on the 4‑hourly chart though so I still want to look at small­er time­frames to see if we can find some pat­terns there as we found here. But the thing I am more inter­est­ed in is if we can find some pat­terns on the 30-minute chart that indi­cate a con­flu­ence with the big­ger time frame.

Thank you

As always thank you very much for read­ing. And please leave a com­ment on your jour­ney to become a trad­er. Ask me any­thing you like or just troll me for being an idiot for find­ing my ‘own way’ in trading.