Excerpt below has some creative idea of using MA to identify trading range that may give you an edge.
Please click here for the article by Thomas Demark.
Excerpt from “Moving Averages By: Thomas Demark“
“To avoid a multitude of signals while locked in a trading range market, I created a moving average system that only became active when price recorded either a 13-day-high low or a 13-day-low high. Let me explain this concept further. If price advances and it records a low greater than all previous 12 lows, then a 3-day moving average of lows is installed and followed for a period of 4 trading days to identify a place to sell. Conversely, if price declines and it records a high less than all previous 12 highs, then a 3-day moving average of highs is installed and followed for a period of 4 trading days to identify a place to buy. The moving average is active for a period of only 4 days after the higher low or the lower high is recorded. As you can see, the application of the moving averages is dependent on the fulfillment of various prerequisites. Other variations of this approach can also be applied. In every instance, however, the key ingredient of any approach is its ability to remain dormant while price moves sideways. Once price breaks out of the trading range, the technique should be sufficiently sensitive to detect any movement that would precede a trend reversal.
For many years, I observed a central tendency for price activity to move within a band defined by a moving average that was identified by multiplying each day’s price low by 110 percent and each day’s price high by 90 percent. This band can be smoothed by multiplying an average of the previous 3 days’ lows and highs and by increasing the band factors to 115 percent and 85 percent. When price exceeded this moving average band, overbought and oversold readings were generated. The percentages presented can be adapted to specific markets.
One technique I developed many years ago I call the TD Moving Average technique. It is designed to initiate buy and sell signals on the first day both of two moving average – a long term and a short term – turn up or down simultaneously for the first time. Generally, the short-term confirms – that is the day action is to be taken. In other words, the first instance they both move up or down versus the previous day’s TD Moving Average readings is the trigger day. Typically, the two moving average periods I use are 13 and 55 days, but the latter period has been adjusted to use as many as 65 days.
I believe another approach has merit, but because of both software and data constraints, I have been unable to test it. This method involves identifying and averaging the median (middle) price recorded each day for a particular period of the day. I plan to experiment with variations of this technique now that I possess the software required; I am awaiting the necessary data.
My moving average techniques are unconventional. They have been designed to counteract the nemesis of all moving average approaches – trading range and sideways markets. I believe that these methods circumvent the obstacles confronting the average trader, and can be implemented to give the savvy trader a market edge.”
Categories: Trading philosophies and thoughts