A moving averages momentum trading system—trade management and forecasting.


Continuing our analysis of the entry triggered by what we described in detail as a system for exploring the momentum of the market, using two timeframes and a set of moving averages, plus the Bollinger bands, part one being [click] here and part two being [click] here.

Stop loss placement and justification

The stop loss order is entered immediately on entry at 5390 as per the previous article, above the 88.6% (maximum) fib retracement of the entry candle on the H1 chart (level marked in red).

Entry timing and limit order usage

The entry at market is at the close of the H1 candle, NB it would be acceptable, and indeed professional, to place either a sell stop entry 1 pip below the close of the H1 candle, likewise a sell limit entry either at the 38.2%, 50%, 61.8% or 78.6% of the H1 candle, for even less risk, though in this case (actually a rarity), such an order would not have been filled.

Initial trade progression

After the entry, there is a dead drop, all seems wonderful.

However, the market is halted for 30 minutes what looks like the 61.8% level of the prior upswing (not marked).

This is followed by lower low, forming a lower high, lower low pattern, promising for our continuation.

Doji candle

There is then a doji candle, just to the left of the ‘E’ in the word entry marked on the above chart.

Lower high progression

Notice that the three candles including the doji and the two to the left of the doji, each have slightly lower highs.

Weak directional closes defined

There are then three upward facing candles, however, each fails to close much above its 50% level – for a candle to be considered bullish, really, we would want to see it closed in the top 25% at least – again a good sign for this trade.

Mini-swing correction defined

Thus what we have is the formation of a mini-swing correction, making up a rectangle potential energy building area, tested several times to the upside, followed by a new swing lower, consisting of three bearish candles,

Three black crows Japanese candlestick pattern

NB. This is also the ‘three black [in this case red] crows’ Japanese candlestick pattern.

As per the figure above, a new M15 swing low is established 2 hours and 45 minutes after entry, as marked by the first red elipse.

Confirmation of swing correction

The swing correction is confirmed by the multiple testing near the entry level forming a region of sideways flow after the entry with a clear top as we just mentioned.

New swing establishment

The break of the low and close beneath it confirms the new swing is being established at the point of the close of the candle whose lower body and wick protrudes through the first red elipse marker

Stop management

The stop can then be brought above the correction high, effectively placed at the break even point.

Chart: 15 minute chart highlighting new swing low formation

Let us look more closely at the targets.

Fibonacci retracements and expansions

In the next chart, we have drawn Fibonacci retracements and expansions using the latest swing down (external Fibonacci retracements), off the back of the swing up before our reversal entry (alternate fibonacci retracements), and finally, by projecting a move that is precisely 200% of the recent upmove, from the top of the most recent pivot high projected downwards, i.e. from the high above the stop loss, to the low before the trade was placed, and beyond by 100% of that move, to include internal retracements.

See the section of the site on Fibonacci retracements, extensions, expansions, and alternate extensions for more information on these.

Price touch of lower bollinger band

As the price continues to drop, it finally hits the new position of the lower Bollinger band on the H1 chart, at 5350.

Cluster of fibonacci retracements/expansions

Thus, we can see a cluster of external Fibonacci lines, using both the most recent swing up which we are deeming corrective, and the most recent swing down, which we are deeming impulsive for the purposes of this trade.

Target of lower bollinger band with fib cluster

As can be seen in the chart, 4 hours after the entry candle, the price reaches the target of the bottom Bollinger band line on the H1 chart – the sensible first target given the sideways trading context on this timeframe.

Sensible flexibility on target

Since this level is 5350, even though the strict 1:2.5 take profit is 5348, it would surely be sensible to accept 5350 as level in itself that is likely to bounce (round 50), which is also the fibs triple cluster area as shown above.

Fib clusters described

Looking at the fib clusters (where levels are almost even with each other), clearly, the 114.6 fib of the most recent downswing is confluent with the 132.8 fib of the prior upswing, which in themselves are in alignment with the lower Bollinger band target – too much to ignore for the sake of a couple of pips.

Notice also how the double cluster of fibs above the ‘Fibs + BBand Cluster’ also acts as a line of symmetry for some choppy market behaviour.

Managing the trade with trailing stops

In spite of many clues pointing to 5350 being a sensible area to make like the wind with profit in our wings, the trade can still be managed using trailing stops as follows.

Aiming for fibs triple cluster

Management of the trade follows the lower timeframe, still aiming for the fibs triple cluster (2.5 x take profit), but locking in profits using a trailing stop method.

New swing low

As per the figure above, a new M15 swing low is established 2 hours and 45 minutes after entry, as marked by the first red elipse.

Correction high

As mentioned above, the swing correction is confirmed by the multiple testing near the entry level forming a region of sideways flow after the entry with a clear top.

The break of the low and close beneath it confirms the new swing is being established from the point of the close of the candle whose lower wick protrudes through the elipse.

Swing trading stop management

The stop can then be brought above the correction high, effectively placed at the break-even point, as per standard swing trading rules.

The trade is now using the market’s money, with risk reduced from 12 points to 0 points.

Target reached

Just a few candles later, the target of the lower Bollinger band on the H1 is reached, and strongly rejected, hitting a triple confluence point.

Confluence zones

The first element of the confluence zone is the Bollinger band H1 lower line as we mentioned.

The second is the 132.8% retracement of the prior upmove, the third is the 114.6% extension of the prior downmove.

Such clusters form likely areas of reversal.

Trailing stop management of the trade

If the trade was not exited for whatever reason at the 2350 level, we are now sitting with a stop at break even, above the most recent correction high, using swing trading rules.

There is now a significant period of consolidation and thin liquidity, mainly due to market hours, which have not been considered thus far, and add to the reasons to have got out at 2350, or at the retrace to 1:2 as a consolation.

However, eventually, the market does create a new swing low as marked by the second red elipse.

At this point, the stop can be brought down to the level just whisker above the candle that did bounce off the original target of the lower Bollinger band, which has formed a correction high.

Eventually, this stop does get taken out at 5360, for a profit of 18 Nasdaq points, for 12 risked initially, that is to say, 1:1.5 eventual risk reward.

There are a number of alternative trade and risk management techniques that could have been employed by the savvy trader.

These are discussed at length in the sections on trading risk management.


In conclusion, we began in article 1 with a rules-based system for describing market momentum using averages, identifying potential reversals in the trend with filters (the Bollinger bands and 20SMA, plus the stochastic oscillator).

We went on to go through a worked example using an operational timeframe (M15) and a confirmatory, higher timeframe (H1) and traced the trade from start to finish, including stop loss, entry, forecasted projections and finally, trade management using either a confluence exit, or trailing stop.

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A moving average reversal, trend and momentum based trading system—example NASDAQ trade



In the last article in this series, we introduced a way to establish intraday momentum on the M15 and the H1 charts, using only moving averages, with Bollinger bands for confirmation of viable trend exhaustion (a reversal).

Let us take the basic anatomy that we have explored and the trade that was identified on the NASDAQ cash index chart, and explore the follow on from that.

We suggested that given the matrix in the previous post, the downward bias can be clearly seen, with the full short term momentum signalling down on the M15 chart, and the first warning on the H1 chart.

Furthermore, recently, the price action had touched the upper Bollinger band on both charts, informing us of a possible trend exhaustion coming up.

Chart setup – M15 and H1

Here are the two charts as a reminder.

Chart 1 – 15 minute chart of NASDAQ cash index

Figure 1. NASDAQ cash index 15 Minute chart.

Signal candle

The signal candle for entry using the system we have built up is the last candle showing on the chart (close of the 1st candle in from the right).

The entry candle has offered a greater price change than any of the preceding 8 candles, and has closed very easily within its bottom 25%, it is a classic momentum down candle, closing also nicely below all three of our short term momentum averages.

Stochastic Oscillator

Notice also that a Stochastic oscillator (14,3,3) has been added and the main line is diverging away from the signal line, and both are pointing downwards, having just breached the 80 level from above, another good sign that we are on the right track.

The downward sloping longer term averages support the directional bias of the trade and add confidence to the entry.

One Hour Chart

Entry, stop and target price

On the one hour chart, we add the entry price, the stop and a 1:2.5 risk reward target to the H1 chart.

Bollinger bands sidways

We earlier noted that the H1 Bollinger bands were trading sideways, in which case, the bottom Bollinger band should be a serious candidate for a bounce.

Price should range between the bands in such a condition.

Entry candle from the one hour chart

Below is the entry as it looks on the H1 chart, the entry being the close of the rightmost candle.

The 3EMA ‘Elbow’

Note the acute elbow-like hook on the 3EMA, which forms our warning 1, given that it closes below the 5SMA on this chart.

One hour chart of NASDAQ cash index

NASDAQ cash index trading strategy

Stop loss

The stop is 12 Nasdaq points from the entry, including spread (5390 VS 5378, respectively).

This level is sufficiently tight, but still above the 88.6% retracement of the H1 candle, what I call the ‘point of no return’.

Alternative stop

An alternative stop would be just above the high of the H1 candle, but no higher, unless we were trading from an H2 chart, which we are not in this case.

Target risk reward level

The ultimate target of 1:2.5 risk reward is conveniently tucked below the current level of the Bollinger band lower line, which we believe will be hit in a sideways market, at level 5348.

We are therefore looking for the momentum to take the Bollinger band itself lower than its current sideways static level, as the market travels down, in order to reach this satisfactory risk reward area.

Trade progression

Following from our previous look at a trade triggered by confluent indications of a downward move starting from the M15 chart, leading the H1 chart and giving a high probability of reaching the bottom Bollinger band, after a reversal near the top of the H1 bollinger bands, sufficient momentum from the moving averages trading system described here.

Let us see the progression of the trade now, using the M15 chart and introduce some more advanced technical forecasting techniques, and visualise the risk management strategy.

Progression of the trade on the 15 minute chart

Complete trade evolution

The above chart shows the evolution of the trade from start to finish, using the operational timeframe, namely, the M15.

This article is continued by using some more advanced technical analysis and trade management techniques.

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A moving average reversal, trend and momentum based forex, stock index and commodities trading system

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Introduction to the first Moving Average Momentum Trading System Series


This article is the first of three articles which develop a moving averages momentum trading system, and go through a worked example of a trade that uses multiple timeframes and a systematic approach to the system.


Our objectives in this series of three article are:- to define a short term, medium term and long term trend using moving averages.

  • to interpret a reversal of the short term trend using a ‘warning system’.
  • to make a systematic reading of overall momentum and direction using two timeframes
  • to go through a workable trading plan using an example, with clear entry, trade management and exit criteria
  • to introduce indicators that can be used for confirmation of a trade setup
  • to introduce forecasting of viable target areas using bollinger bands and fibonacci confluence clusters

Structure of the series

This post, post one, introduces key concepts and identifies and analyzes a trade setup using a ‘matrix’.

Post two goes through the trade’s evolution from start to finish in simple terms.

Post three examines the trade management and forecasting aspect of the trade.

Moving Averages as Momentum Indicators

Moving averages can operate as useful indicators of market momentum.

Let us define the short term momentum by way of three moving averages, a three periods, five periods and eight periods moving average.

By period, we mean the time it takes for a full bar or candle to form on any time frame.

Using two timeframes

Let’s take the fifteen minute chart as the operational timeframe for the purposes of this article.

And we shall take the one hour chart as the upper timeframe for the purposes of verification.

Let us define the shortest term momentum by way of the exponential moving average (EMA), 3 periods, and using the close price in the calculation.This will plot an average that gives greater weight to the more recent closes.

Early warning system

The 3EMA will closely follow the market.Strong moves in a reversing direction will create an angular ‘shoulder joint’.

Strong moves in a given direction will create a strong unbroken line in a given direction.

The 5SMA will follow the price action more slowly, but faster than the 8SMA.

The short term trend

The 8SMA is our ‘crux of the short term trend’.In other words, its pointing towards 2pm or higher means we are in ‘uptrend mode’.Its pointing towards 4pm or lower means we are in ‘downtrend mode’.

This goes for both the M15 and the H1 charts.

Reading momentum mechanically

Let us take this further and say that:

  • When the 3EMA crosses the 5SMA from above to below, this is the first warning that the market trend may be moving from up to down.
  • When the 3EMA crosses the 8SMA from above to below, this is the second warning that the market trend may be moving from up to down.
  • When the 5SMA crosses the 8SMA, and the 8SMA is now turning down, this is the third warning, and the confirmation that the trend may have moved from up to down.And vice versa for down to uptrending market in the short term.
  • We have thereby defined by rules an uptrending market in the short term.

    The backbone of trend change

    For potential reversals back to the initial trend before the short term change, let us consider the 20SMA as a support/resistance, particularly when it is pointing in the direction of the longer term trend (2pm or 4pm).

    Thus the 20SMA is a filter for false short term trend changes, or alternatively, defines for us that a short term trend change is a correction, rather than a fuller trend change.Support and resistance – medium term trendFor medium term trend, let us consider firstly, whether the price is trading above or below, and secondly, the slope of the 50SMA.Let us consider the 40SMA as ‘pre-warning’ support/resistance.

    Long term trend

    For the long term trend, let us consider the 100SMA and 200SMA – what is their slope, their relationship to each other, and finally, the relation of the average to the current price.Finally, let us introduce a pair of Bollinger Bands, set at 20 periods for the 20SMA in the middle, and two standard deviations either side of the 20SMA to give the upper and lower bands.The Bollinger Bands, if flat, indicate a sideways trend from one side to the other.

    The Bollinger Bands, if sloping, give a price level to consider the market as overbought (look for our reversal) when considering the upper band, and vice versa for the lower band, also looking for our reversal warnings and confirmation.

    How to read a momentum based moving average strategy summary

    We now have a complete system for defining the momentum of the market using moving averages.We have a short term trend defined by the slope 8SMA, with warning guidance of a change indicated by the 3EMA and the 5SMA.Above the 8SMA, the price is in long mode.

    Below the 8SMA, the price is in short mode.

    Above the 20SMA, if the 20SMA is sloping up, we are still in long mode, but assuming a correction to the 20SMA, if the short term trend is indicating short.

    The 40SMA and 50SMA offer support and resistance and tell us the medium term trend.The 100SMA and 200SMA offer support and resistance and tell us the long term trend.We are using an operational and upper timeframe.

    Matrix of possibilities

    Let us consider a matrix of possibilities as to what we may be seeing on our charts in the following two example figures.

    Figure 1. NASDAQ cash index 15 Minute chart.

    NASDAQ M15 chart

    Figure 2. NASDAQ cash index 1 hourly chart.

    NASDAQ H1 chart

    Figure 3. Matrix of possibilities.

  • Slope refers to pointing up or down.
  • Price relation refers to whether price is trading above or below the average and to what extent.
  • Direction refers to confirmed up or downtrend, warning 1, warning 2, or warning 3.
  • Of course, the granularity here is crude, in fact binary, but fit for purpose for this article’s illustration.

    M15 – slope DN DN DN UP n/a UP DN DN
    H1 – slope DN UP UP FLAT n/a DN DN DN
    M15 – price relation DN DN DN UP n/a UP UP DN
    H1 – price relation DN DN UP UP n/a UP DN DN
    M15 – warnings (DN) (DN) (DN)
    H1 – warnings DN (UP) (UP)
    M15 – reversal DN
    H1 – reversal DN
    Bollinger band sideways or slanting – M15 UP
    Bollinger band sideways or slanting – H1 SIDE
    Bollinger band touch – M15 DN
    Bollinger band touch – H1 DN
    M15 – conclusion 14 DOWN signals; 5 UP signals = 73.6% down
    H1 – conclusion 11 DOWN signals; 7 UP signals + BBands Flat = 61.1% down
    OVERALL CONCLUSION / TRADE IDEA The crude bias is down and the M15 is offering a leading trade, established short term down momentum, with the H1 3EMA warning now in place. With the H1 Bollinger Bands being flat, the logical extension is to the lower Bollinger band on the H1 chart. At this point, due to the sideways nature indication, the lower time frames should be used to trail the stop according to swings (trade management 1), aiming for the 1:2.5 risk reward. Alternatively, 60% of the trade can be closed (trade management 2), with the stop then brought to breakeven, again aiming for the 2.5 risk reward. Or both management methods can be employed (e.g. Close 75% of the trade, trail the stop with the remaining 25%).


    By utilising a number of moving average indicators, we can define the market’s trend context in the short, medium and long term, and identify changes by way of pre-defined rules based on a limited number of parameters.

    In the next articles, we will trace this trade through from start to finish.

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    Trading the DAX opening gap

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    go to first figure in article

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    -BASED ON THIS POST (coming soon)



    Just a quick share for members and non-members alike, pointing out the possibilities of trading a gap down to its open.

    Gap size

    This morning, the German DAX cash index opened with a gap of about 20 DAX points.

    There was no commensurate overnight up-move in the S&P500 CFDs, which might indicate risk-on sentiment and a strong move up in advance.

    Post-gap action

    From 7am London time, the market continues to advance away from the gap, with some technical signs of overheating.

    First sell order

    In the first order, a sell stop is placed to sell the market at 12467.2 just before 8am London time. The market continues to advance, so this order is not filled and is cancelled.

    At precisely 8am London time, the latest 5 minute candle shows strong bullish candle, but which again shows technical overheating, and several of the other timeframes are also showing such overheating.

    In this case, the overheating indicator confluence happens to be the Commodity Channel Index (CCI) set to 5 periods, and the overheating level is 167.

    Second sell order

    A sell stop is placed just below its high, at 12477.5, with a tight 4 point stop loss and a take profit of 12445.5. The stop loss is promptly hit, which is to be expected with such high reward trades.

    In this case there was an additional 0.2 points of slippage, taking the loss accrued to 4.2 points – not exactly a bank breaker!

    The idea here is to accept small losses, but to stay in for the big winning trades.

    Third sell order

    We will have one more try, the order being set to enter again, after the doji just below its open and just below the high of the overheating candle before that, an aggressive sell stop entry entry of 12378.35.

    NB In the Quantisi Ltd. trade plan, which I will be making commercially available via this blog, a maximum of 3 units or 3 tries at any one given trade is the absolute maximum, and sticking rigorously to the risk management strategy is as always, essential.

    Sell stop order filled

    Figure 1, below, shows the trade having been placed. The entry is shown by the green dot-dashed line at 12478.35 (bid – filled), the stoploss is just 3.15 DAX points above that at 12481.5 (ask), allowing 2.15 pips of upward movement over and above the 1 pip of broker’s spread factored in.

    This is an exaggerated tight stop, however, for the purposes of this trade it worked fine. The reason for the extreme tight stop is the desire to obtain a very good risk reward ratio, especially since the first trade did not work out and this is chance 2 out of a potential 3.

    Figure 1. The DAX gap trade several minutes after being filled

    Trade risk management parameters

    The take profit is at 12455.9 (ask). Therefore 3.15 pips are risked (including broker’s spread) while a reward of 22.45 pips are sought. This includes 7 x 3.15 pips and an additional 0.4 pips to account for negative slippage on the trade.

    This is actually a very conservative target, given that the gap trade normally seeks to fill the gap itself (see also figure 4). What we are actually targeting is the opening candle after the gap, so it seems a very reasonable target since many gaps seek to be filled. More on identifying specific types of gap and what to expect from them in stock index trading in another post.

    The precise risk to reward ratio of the filled trade is 1:7.127, or rounded down, 1:7, more than satisfactory given the 1:2.5 minimum advocated in our trade plan rules.

    Figure 2 shows the evolution of the trade, and indeed when the price has hit the take profit (buy limit) level, the order is filled, and in fact, we are granted the treat of positive slippage of a luxurious 2.2 points – another good reason to use our recommended brokerage.

    Take profit (buy limit)

    Figure 2. Take profit order filled.

    Figure 3 shows the three main order sets mentioned, the first the trade that was not filled and cancelled, the second which resulted in a stop loss being hit, and the third successful 1:7 risk to reward trade, with the final risk reward being 1:7.825 – a great result.

    Figure 3. Order sequence and results from trading platform

    Figure 4 demonstrates clearly how this was a low risk, high probability trade, whereby the market itself has actually gone on to fill the gap after a potential energy – kinetic energy correction – impulse sequence.

    Figure 4. Filling of the DAX opening GAP on the M5

    DAX Gap Trade: Discussion & Analysis

    Technical indications

    Rarely does ‘top guessing’ offer benefit to the trader, except in the case of opening gaps, and/or high level confluence clusters which offer reasonable limit order entry solutions.

    CCI overheating

    A forthcoming post will detail the use of the commodity channel index (CCI) in much more detail. For now, the key to the chart is that the red arrow ‘caps’ above the candles indicates that the relatively longer term or trend CCI (in this case set to 15) has ‘overshot’ to a level of 280 or above (in the case of upward momentum, -280 in the case of downward).

    Three of the red caps in a row often indicate an imminent correction or reversal.

    The white ‘caps’ on the candle tips are an indication of the period 5 CCI having hit its ‘overheated’ or ‘overshot’ mark of 167 (166.6 recurring).

    Divergence on the RSI-7 indicator

    The RSI-7 indicator is in the second indicator window off the chart. Divergence means that while the price has risen, the RSI has fallen, or while the price has fallen, the RSI has risen (classic divergence). This is seen as white trendlines on the chart.

    As can be seen, there were two clear divergence set ups, the second, more steep divergence right before our second entry, and which acted as the guarantor of the reversal.

    Reversal candle

    Probably the perfect entry was at the close of the 8.05 AM London time candle (marked 10.05 on the chart) because this was a ‘normal reversal’ candle. Our aggressive entry used ‘reversal condition 2’ – which will be discussed in another post – and refers to a break below the high of the candle previous to the prior candle (i.e. at time minus two periods, t-2), in a down reversal, or a break above the low of the candle previous to the prior candle (i.e. that at t-2) in the case of an up reversal.

    Stochastics & WPR_MA

    Although they were not really utilised in the trade, note that the stochastics were in a prolonged overheated mode above 85, and the WPR_MA WPR (William’s Percentage Range (21) with moving average (8)) lines were beginning their descent towards their average, the top and bottom versions offering multiple timeframe analysis – M15 and M5 in this case.


    Summary of trades

    This trade used knowledge that an opening gap is often filled with a range of indications of a reversal. The first trade was cancelled due to a continuation away from the gap. The second trade failed. The third trade, similar to the second, succeeded in following through, for a 1:7.8 risk to reward. Therefore 1 unit was lost, and 7.8 gained.

    Learning points for trading journal

    The initial trade exceeded the 1:7 risk reward by double, simply by filling the gap. Consider in future 2-3 units with a more reasonable stop, e.g. double or three times the stop used in this trade, closing out 1-2 at the first target, or 1 at the first target, 2 at the second target (twice the height of the first rectangle shown in figure 5), stop to breakeven, and 3 with a trailing stop to let the market run.

    Target 2 projection

    Figure 5. Projection of height of the first swing above the gap in the downward direction.

    In figure 5, the height of the first swing above the gap is taken as 34 DAX points (the green rectangle shows this until it is broken to the downside.

    The height of this move is then projected downwards as a further move of 34 DAX points, providing a second target.

    About the author

    Dr Samuel Alexander Beatson gained his PhD from the Research Centre for Banking & Finance at the University of Nottingham in 2015. He has taught financial markets analysis for more than ten years, including during a two year position at King’s College London, as a researcher and fellow at the Lau China Institute. He is the head of trading and market analytics at Quantisi Ltd.

    Freddy FastTrack’s quote of the day

    The idea here is to accept small losses, but to stay in for the big winning trades.

    Top 3 Trading Moments from this trade

    FREE PDF version of this article is available for saving or printing, click on the pdf icon below (opens in a new window).

    DAX opening gap trade M5

    To cite any part of this article, use the following citation information: Beatson, Samuel A., "Trading the DAX opening gap," in Forex, Commodities & Stock Index Analysis by Dr Sam Beatson, May 2, 2017, Accessed online on January 22, 2019.

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