Moving Average Respect Example

Apr 28, 2008: 12:48 PM CST

In my trading, I utilize moving averages to determine trend, support/resistance, and price structure.

The example today from the FOREX Australian Dollar / US Dollar cross (AUD/USD) showed an excellent example not only of how price can respect its key moving averages, but of momentum divergences as well:

This is a 5-minute chart of the cross, which shows price beginning the morning (5:00am) flat before crossing under its key moving averages and then each successive pullback was resisted by the key 20 period EMA.

A momentum divergence formed until 8:00am, at which a large volatility move pushed price to a new momentum high and crossing above its key averages.

The moving averages themselves crossed, and each successive retracement back to the key 20 period EMA was met with support (providing a simple trade set-up to play for a small target with a small stop/risk).

As price traveled higher, yet another momentum divergence formed, warning that the buyers were lacking power to push the cross higher, and that successive pullbacks had reduced odds of holding support at the key 20.

TradeStation now offers simulated trading, and I’ve been doing some work with FOREX and finding very satisfying and encouraging results.  This example shows how key averages can support or even create low-risk trading decisions.

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