In one of our trading lessons, we have learned the basic of Moving Average. Today, we are going to get acquainted with a simple strategy which is mainly based on Moving Average.
Let’s Be Familiar with ABC Pattern
The strategy is derived from the Moving Average (25 SMA) and the H1 Chart. However, there is a very basic price action which is followed almost every time by the financial markets as far as breakout, confirmation and signal for trading are concerned. We might as well be familiar with it first just to understand today’s Moving Average breakout strategy better. Have a look at the image below.
I have chosen a bearish price action here. Please note that the bullish price action acts very similarly as well. First, to start with, the price started its bearish journey from point A and made a breakout at the red boxed area.
A Bearish breakout occurs at a place which earlier was a support level. Let us assume that the price comes up to point B from point A and starts having a pullback. Usually, it goes all the way to the breakout level. In this picture, it is pointed at point C. This “C Point’” is very crucial. It is the starting point of a new bearish trend and makes a new lowest low (for a bearish price action). Thus, professional traders wait for a reversal candle at the “C Point” and make full use of it.
Is C Point Always a Fixed Point?
The answer is “No”. Since there are many kinds of breakouts such as Horizontal Line breakout, Trend line breakout, Moving Average breakout etc, the C point may not be a fixed point. For Horizontal Line breakout, the C point may be produced at a fixed level or zone since it usually is produced at the breakout level. For Trend Line breakout, C point may be produced at the trend line after the breakout.
Thus, we cannot be sure about the level it may be produced, since, after a trend line breakout price pulls back to confirm the breakout. If the pullback comes fast, it confirms it at one level. If it comes slower, it confirms at a different level. Sometimes, even, the breakout is not confirmed by a pullback at the trend line. It is, rather, produced at a significant level of horizontal support or resistance. Using a Moving Average, point C keeps moving, which we will know in a minute.
Let’s Get into Breakout Moving Average Strategy
Now that we know what “C Point” is; let us find out how it works with the Moving Average. Look at the chart below.
The price made a bearish breakout first and after a long bearish journey, it made a bullish breakout as well. In both cases, the price after having pullbacks went towards the existent trend by making a C Point. An interesting point is on both occasions, C Points were produced right at the Moving Average which always keeps moving. Let us take a look at the signal candle to go short here.
After making the pullback up to the C Point, the price was heading towards the downside. The momentum was not that good though. However, see the arrowed candle which made the price come out from the box. In fact, that made a breakout at the lowest low of the trend. Thus, this is the entry candle.
We have to be very meticulous here. One of the candles is to breach the level of the highest high or lowest low with good momentum to offer us an entry. The price here then made a huge bearish move towards the downside after making the breakout. Can you spot another short entry here? Have a look at the chart below.
Again, the Moving Average is held by the price and another bearish candle made the price come out from the box. It means another short entry for the sellers.
After the last bearish breakout and bearish move, the price made an upside breakout at the Moving Average and came back for a price correction. Another C point, but this time it is for a long entry. Look at the chart below.
Arrowed candle made the price come out from the box and the price headed towards the North with strong momentum.
Is It Only C Point to Look for?
Now have a look at the chart below which has a serious message to give us.
The price again had a pullback and it came at the Moving Average. Buyers must have been excited again since they have another C point to go long again. However, the price did not go towards the upside.
The reason behind that is the price did not make a breakout at the highest high of the bullish wave (did not come out from the box). Thus, the C point is not the only thing, we should look for to be able to use Moving Average Breakout Strategy; One more breakout is needed to take an entry.
The Best Time Frame
The best time for the Moving Average breakout strategy to be used is the H1 chart. We shall insert 25 Simple Moving Average (25 SMA) on the H1 chart and do some back testing with the pairs that we may want to trade at.
The Best Pairs
This strategy works well on major pairs such as EUROUSD, GBPUSD, USDCAD, EUROGBP, EUROAUD, AUDUSD, NZDUSD. Of course, it should work well with other pairs as well. Before choosing a pair to use the strategy, we shall count the pairs’ spread and range. We must do some backtesting on how our chosen pair has been reacting at C points.
Things to Remember
These are points to be remembered before taking entry with the strategy.
- The breakout is to be a strong momentum breakout
- The price is to come back to the Moving Average and it is to be held
- A strong reversal candle is to be produced at the Moving Average at the time of pullback.
- The price is to make another breakout to offer entry at the level of the trend’s highest high or lowest low.