Moving average and candlestick patterns – Lesson 11

The moving average and candlestick patterns are of great importance and it is not that I speak of the triple crossing of death or very violent moving averages. I’m talking about the long-term averages that are what use the managers to follow a continuous trend.

The theory of the moving average is very simple and since there are only simple or exponential moving averages, those of a lifetime this makes it useful for the tracking a portfolio over time. I will not expand on whether it is better to crossing of moving average than another, I will only delve into the crossings of moving averages in the long term to observe turning patterns.

To avoid noise, it is quite useful to throw the moving averages, what do we get with this? What give us less tickets the crosses but that these are more reliable. The launch of moving averages, Bollinger and other indicators will save us a lot of money throughout the time.

A very simple example of these crosses would be the crosses of moving average of 200 and 800 periods, given that they are sufficiently long periods for, when happen we can find or points of entry or continuation of trend. As example we will put the average of 200 periods in the S & P index that is always touched each three days; This type of information can give us clues as to what to do.

Soothes prices by reducing “noise” and allowing a clearer view of the direction of the movement, although it delays the performance of the market. Do not anticipate movements, confirms them.

As a general rule its uses are the following:

When prices move above the average -LONG

When prices move below the average -SHORT

Short-term moving average above Long-term average -LONG

Short term mobile medium below Medium long term -SHORT

Period: For short-term strategies, short moving average (5 and 20), which will generate many false crosses. We must find an optimal period in which the average closely follows the price and at the same time not affected by noise.

Medium and long-term strategy, longer periods (9 and 18 medium term; 20, 50 and 200 for daily) that will have less noise, although they will take time to confirm.

In lateral markets it is better to use short stockings that will detect the oscillations. Yes, the market takes trend we will use medium and long term that will eliminate false corrections.

On the other hand, Japanese candle patterns are a kind of imported graphics not created by Mr. Steve Nison that have served us of great help, but neither has been the panacea as some think. We have already we used to manage lifelike figure and figure charts that are very similar, contribution of that kind of graphic was the combination of many candles as patterns sets.

I do not recommend ever going to analyse each candle or each pattern because the truth is almost infinite and complex interpretation. It’s just like a complex interpretation of the waves of Elliot that in the end the only thing that will make us confuse us about the price only with a complex count of waves and modules.

We must consider in daily or four-hour graphics certain patterns of change that are the ones that will really make us support our operational decisions.

Even though most operators think that indicators and macro data they are what direct the market the reality is very different.

The price is the most important thing of the trading and each operator must weigh what is his operative and the conditions that are taken to access it. Only the observation of each price candle will tell us if the price is driving, correcting or turning.

The observation with patience of the price and its regular movements will be who we tell us whether we should operate or not. All the big operators and winners in the trading were big price observers.

Japanese candles help us to have a broader view of the behaviour of a certain asset.

One of the most important patterns of Japanese candles are Doji or candles long legs.

The engulfing candles are what will tell us if there is a price change.

Consecutive or warrior candles will give us continuation patterns.

The stars candles will give us exhaustions of the market.

These are the examples that we think can be interesting and very easy search even with the inexperienced eye. There are systems for example for MT4 that are they implement with great ease that they warn you of the appearance of certain patterns, it is never less that indicator when you are learning to look for that type of figures.

Although the Japanese use only the candles to operate they have the method a lot more refined and follow another path. As an example, the Tokyo stock exchange opens the half the time of the rest of the world’s stock exchanges and if you put a graph of the index Nikkei in a minute you will see how they operate according to other types of behaviours and performances.

We must then look for this type of patterns in large graphics and with the rest of factors that make us determine a position. It is highly recommended to read the few books on the subject in order to study and cultural knowledge of how they operate in other parts of the world. The easier to read is the book that Steve Nison wrote after his visit to Japan to develop introduce this type of analysis in the USA and Europe. The book is called “beyond the candles “and has historical and other eminently theoretical parts about the matter.

It is quite complex to operate only with candlestick patterns, however, if an operator feels comfortable performing this operation is perfect given that, this only will use the price to enter or exit the market.

Do not miss our Learning Forex: Lesson 10

Forex managed accountsMoving average and candlestick patterns – Lesson 11

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