3 things to look out for when you trade moving average bounce

Most active traders use the moving average bounce strategy. This strategy is a particular favorite among other ones because of its simplicity and the simplicity of the requirements. All a trader needs to incorporate this strategy is a simple charting package.

When using this strategy the three things to look out for are: a shift from the exponential moving average line, a retracement towards or crossing the exponential moving average line and a bar that breaks upwards.

The moving average bounce strategy is quite simple first the trader needs to look for the signs of the price falling towards the moving average once this happens it will usually be followed by a strong move in the upward direction away from the EMA line. But usually when the price is moving away from the EMA line there is a string tendency for it to retrace its path and even move below the EMA line, but once the price retraces below the EMA line it will move up higher. This movement is called the bounce off the EMA line.

For instance while trading a security with the bounce off moving average strategy the trader should start by looking for a clear indication of a move away from the EMA line. Once a distinct upward movement is noticed wait for the price to retrace its path down ward. You will need to confirm the downward retracement by waiting for at least four bars ach one moving lower in that direction. This will ensure that it’s not just a sideways movement and the retracement has indeed begun. There may be times when the price may fall below the EMA line and this can create a lot of anxiety and panic among traders but this movement is just the effect of many traders buying and selling the security. Also it is highly unlikely that the price will stop exactly at the EMA line each time.

Minor upturns are also possible and often seen once the price crosses the EMA line downwards are moves up for a short period only to retrace its path downwards again. The most important thing to observe is the number of bars headed towards the EMA line which should be at least 4. Once the minimum number of bars is observed you can place a buy order. There are two points at which a trader can exit. If you would like to minimize your risk you can exit once the price registers two lower low bars below the EMA line whether you are using a one minute or 5 minute chart.
Another option is to wait for the bounce which comes after the retracement. Once again it’s important to wait for the 4 bars in that direction to avoid trading owing to market noise. While using this strategy a trader is to enter a position before the bounce occurs so that he can gain from it. Even though sometimes there may be a delay of a few hours after the move away from the EMA line, generally the security will trade higher following the bounce. The criteria set for this strategy are not fixed and can be customized to meet the requirements of the specific trader. Also a good accompaniment to this strategy is patience.
How this strategy is used by a trader entirely depends on his/her choice. Some traders choose to bring a price targets or percentage gains into play. This means that a sell order will be set at a particular price percentage. The other option is to wait for the bounce to reach its upward peak. There are pros and cons to both approaches while setting a price percentage is a safer option it can stop you from gaining more when the price moves beyond the level at which the price percentage has been set. On the other hand if you wait for the bounce to reach is peak there is no guarantee how much time it will take or even if it will reach the anticipated level.
Since the system does not tell you about how high the bounce will be it is important to trade accordingly. The EMA line acts like a spring board in this case so when the price hits this point it bounces off to a higher level. It is generally observed that once the price continues to go higher it will not trade below the EMA line for quite some time.