Forex Trading Moving Averages: The secret is out.
Had another day of watching the EURUSD wiggle around the 200 tick MA on a five minute chart and managed to convince myself that it would probably move up to the central pivot before moving down. Of course it did nothing of the kind – it simply dropped a solid 170 pips over the next few hours leaving me pissed off on the sidelines…. (late note: and then continued on to make it a whole 250 pip move – damn!)
After sulk session of growling at the screen and berating myself while trying to figure out my screw up, I have finally convinced myself that I have discovered what appears to be “the” rule on moving averages for 24 hours markets. In fact I have touched on it in an earlier post, but today nailed it.
The rule in words is to find the average price over the last 24 hours. As simple as that. If today is better than yesterday it will be above it and if worse below.
The important thing is that on the EURUSDÂ this line swamps the central pivot point. Well at least it has over recent weeks. If your central pivot is above it, the market is bearish, forget any possible thought of it retracing through the days average unless the trend is changing. This thing is like a brick wall.
The trick is your time scale. On a 5 minute chart it is a 288 period simple moving average. On a 15 minute chart it is a 96 point moving average. NOT 200 and 90 period moving averages – they are close, but no Kewpie doll.
Work out how many of your ticks there are in your favorite time scale over a 24 hour period and set the moving average to that. As an example there are 12 individual 5 minute ticks an hour so a day will have 12 x 24 = 288 of them. At 15 minute ticks, there are 4 sets of 15 minute ticks an hour, so a day will have 24 x 4 = 96 of them.
You probably use 20/90/200 MA’s don’t you? Well rethink it and get anything off your screen that is not rock solid. It will just confuse you. Just remember that even random lines will show some apparent evidence of support and resistance at times.
(Late edit: put your 200 back – perhaps as a thin line, now I have taken it off, I am finding that sometimes it holds. The hypothesis is that when automatic programming that uses the last 24 hours average price dominates then the 288 on five minute dominates, but when humans are the main players, the 200 dominates.)
Easy huh. Just weird numbers is all.
P.S.
The reason 20 day, 90 day and 200 day MA’s work on daily charts is because the correspond to a month a quarter and a years trading days. And yes 200 ticks work on weekly and monthly – but that is because people use them rather than people asking the “Is today better than the average over the last month/quarter/year etc” question.
EURUSD May 5th 2010, 5 minute interval with the 288 tick MA in blue.
May 05 2010 02:09 am | Trading
