This post was contributed by a guest author, and does not necessarily reflect the views of Richard or MovetheMarkets.com
Originally, I set up the rainbow chart with WMAs 10 - 240 on a 144 tick chart. That seems to be a common setting for tick chart users.
I also plotted those MMAs on a one minute chart, but then the longest MA would encompass four hours. Using the one minute chart for an example, I used several MAs in increments of three - from three to 59. The reason I’m using the minute based chart is so that its easy to see that we’re talking about one hour. For day trading, these could be considered long term holders. Obviously, traders use different time frames depending on their style.
On this particular chart, the light blue lines paint a picture of the short term action, while the red lines cover the longer period. So what’s the big deal with all of these MAs. Here’s one simple strategy to help you identify the trend, and find an entry point.
I circled two possible entry points that would have enabled you to ride this trend down. If you are a scalper, you could grab a few quick points, and be done. This is the basic idea. Since the red lines are the longer MAs on this chart, watch for them to spread out. If they are widening in an orderly fashion, watch the blue lines for a possible entry. When the blue lines converge, and form a hook, your entry point is when they start to move down. How do you know its a safe entry? Well, you don’t really know anything, but with the red lines spread out, the chances of that pullback turning into a reversal of the dominant trend is unlikely.
On these two trades, the CCI confirmed the entry.
The basic premise behind MMAs is to help determine the dominant trend, and find a safe place to enter in that direction. Hopefully, as a new thrust is starting.
This post was contributed by a guest author, and does not necessarily reflect the views of Richard or MovetheMarkets.com