Moving Averages as a lagging indicator, confirming trend rather than anticipating it, is considered less reliable by many. But, combining Moving Averages with Fibonacci number, and following price action around it, can give quite a powerful signal. In this case, a Simple Moving Averages on Close price, combined with Fibonacci number (89) as it period.
In short, price can either “break through” SMA89 or “bounce back” from it. But then, as can be seen in the following picture, there are many breaks as well as forex bounces; and not all of them are valid signals which shows profitable opportunities.
Thus, a filter to weed out the false alarms from the real deal is needed. But, instead of applying another indicator, a trader can use price behaviour towards the SMA89 and set a rules to recognize the real signal.
Break Through Rules:
1. A “break” is considered true when price crosses SMA89 where it's Open and Close price are on the different sides of the Moving Averages.
2. At least 5 (five) prior bars/candles must be “free” (or doesn't even “touch”) of SMA89.
3. The break must be followed by a “confirmation candle” (bar or candle which is the same direction as the break candle).
4. Enter the market by the Close of confirmation candle or the Open of the next bar/candle. In this example, it is Buy.
Bounce Back Rules:
1. There are three different situations which can be called “Bounce Back.”
a) Price breaks through SMA89 but, instead of confirming the break, the next candle re-breaks the Moving Average.
b) Price penetrates SMA89 (Open and Close on one side of SMA89 and High or Low on the other side).
c) Price came close, within 5.0 pips or less, and reverse.
2. Depending on whether it is Bullish or Bearish Bounce, wait until price closes beyond previous High or Low.
For both signals, break and forex bounce alike, place Stop Loss between 1.0 to 2.0 pips beyond the last High or Low. For profit taking, on the other hand, there are several possibilities:
1. Trailling step
The best range is Fibonacci number 21 (Means stop loss is moved to entry when floating profit reach over 21.0 pips, moved to profit 21.0 pips when floating profit reach 42.0 pips, and so on.
2. All or Nothing
Move Stop Loss when price reach floating profit of 21.0 pips and then let price moves until either target profit or stop loss is hit.
3. Fixed Profit at any rate up until 50.0 pips.
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