Moving Averages pullback strategy

 

 

Moving Averages pullback strategy

Moving averages offer a high return-on-investment for a minimalist trader.

A moving average is simple to understand and serves multiple purposes for traders. A moving average can track trends and pinpoint entries.

Hence, you often see moving averages in simple pullback trading strategies. Here, we will go through four approaches that take advantage of this elegant trading tool.

The first two strategies use one moving average, while the other two use two moving averages.

Strategy #1: Candlestick with Moving Average

In this method, you’ll use the moving average as a support (resistance) zone. If you are already familiar with candlesticks, this strategy is straightforward.

We need two ingredients:

• The market pulls back to the moving average.
• The market forms a candlestick pattern.

Some candlestick traders haphazardly look for patterns and entries. This strategy avoids that problem as it offers a disciplined approach to trading candlestick patterns.

You will not need to search for candlestick patterns all the time. You look for them only when the market pulls back to the moving average.

Let’s look at an example below.

 

Moving Averages

1. The moving average tracks the bullish trend and offers a support zone.
2. The confluence of the Engulfing patterns and the moving average point to reliable pullback entries.

Strategy #2: Two-Legged Pullback to the Moving Average

Al Brooks popularized this setup (M2B, M2S) in his series of price action books.

Like Strategy #4, it assumes that the moving average will support the trend. But instead a specific bar or candlestick pattern, it looks for a two-legged pullback.

The chart below shows how a two-legged pullback looks like.

1. This strategy uses a 20-period exponential moving average. When the market generally stays below the moving average, we start looking for two-legged pullbacks upwards.
2. These are two instances of two-legged pullbacks to the moving average. The price legs are marked.

For this approach, traders look to enter a pullback trade at the end of the second leg.

Strategy #3: Weighted MA with Hull MA

This fascinating dual moving average strategy originates from a popular trading forum thread.

It uses two moving averages:

• A long-term weighted moving average to track the market bias.
• A Hull moving average to track price waves.

1. We consider only setups in the direction of the weighted moving average. The higher high and higher low affirms a bullish market structure.
2. Each close above the Hull moving average after a pullback offers a long entry. (Provided that the bullish market bias is still in place.)

To learn more about this strategy, refer to this guide.

Strategy #4: 9/30 Trading Setup

The 9/30 setup is often recommended for new traders as it is easy to understand.

The two moving averages in this strategy are:

• 9-period EMA
• 30-period WMA

It uses moving average crossovers to define the current market trend.

Then, depending on the price action relative to the moving averages, it allows for aggressive or conservative entries.

The chart below shows one aggressive entry followed by a conservative one.

1. Bullish crossover hinted at a possible bullish trend.
2. Aggressive entry – setup bar overlapping with the 9-period EMA.
3. Conservative entry – setup bar entirely below the 9-period EMA
4. Pullback setup invalidated as the entire bar went below the 30-period WMA.

For more examples, refer to these articles:

• 9/30 Trading Setup
• 3 Ways To Enhance the 9/30 Trading Setup

Other Indicators

In this last section, you’ll find a variety of trading indicators for pullback trading.

When using indicators, it is crucial to keep things simple. Each indicator places some distance between you and the underlying price action. So be sure that each indicator you add is of value to your analysis.