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

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Review

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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Coming soon... signals every day. Pepperstone Group Limited

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