Creative use of moving average 200 on daily chart

Moving average is one of the oldest and most relevant technical indicator in the market today.It can be used to determine the on-going trend and to generate trading calls from time to time. This indicator has proved its reliability over a long period of time.I have been using moving average indicators for as long  as far back as I started trading around 2007.Let us see how it can be creatively applied.

 

Moving average indicators function in the same way and capacity as a correctly-drawn trend-lines. We have a rising moving average in an uptrend and a falling  one in a downtrend just like the trendlines.
The application is to either trade the rejection(test of significant price levels or false breakout) or break-out.This has to be explained before we continue.

The diagram above shows the 200-day EMA in action.We had a situation of false breakout here.In this case, a green candle in  the yellow ring opened and closed above the EMA. This ought to give us the signal to open a long position.But the next candle was a bearish one which successfully broke the low of the green one in the yellow ring.The conservative practice is to sell by placing an order below that same red candle.

 In the picture above is a scenario which we can call "true breakout."We have it that a red candle which is also a bearish one opened above the 200-day EMA and sustainably closed below it.The expectation of the bears would be high under such conditions.Be that as it may, they still have to be conservative and wait for price to fall further below the low of the red candle in the yellow ring by atleast 5 or 10 pips.Then and only then can we say that we have a true breakout.And then the momentum is on the bearish side.We can then expect a great and sudden fall.
This is one of my many applications of the moving average indicator and it is my favourite set-up as well.You may please forward your email or leave your comment.I am the author of this blog. I can write for you on your forex blog too for a token.