Ahh, averages. Almost everybody started trading adventure with them. They are not that bad if you use them for something more than signal from the cross.
What type of averages? Expotentiaand Linear Weighted averages should be the best choice in most cases.
When we talk about scalping with averages then it is most likely that we want to:
- have information about trend (and therefore trade) direction
- have signals based on averages
When it comes to signals, we should remember that signals can occur:
- after the cross of averages
- when price close above or below average (for example 100 or 200 or other)
So we have few combinations here.
When we talk about averages in scalping then we have to talk about Rainbow chart. There was a day when it was a very popular approach to trading and especially scalping Forex.
As you can see, Rainbow chart is simply a set of averages divided into groups. Each group has a different color. When averages are wide, we can see that trend is strong.
Also, in classic approach price chart is set to line. The main goal here is to make things simple. When you see that the price line is above all averages you go short. When averages are positive and price line is above them you go long:
Of course you can use candles and join Rainbow with other tools like MACD:
It takes time to learn how to scalp with Rainbow. It has pros and cons, but it is a good strategy for new traders. They can understand and see the difference between the range and trending markets.
Another, rather popular use of averages is GMMA. This strategy was created by Daryl Guppy and it is named after him (Guppy’s Multiple Moving Averages). It is similar to rainbow chart, but we have two groups of averages: short term and long term. It is recommended to also add longer trend averages like 100 and 200 like in chart below:
A nice modification is to build it from Rainbow average which has three colors (for a move up, down and range). You can download all here.
Of course you do not have to use rainbow charts. You can go with most important ones or play a little bit like I did below:
On the chart, you can find averages 10, 20, 30, 60, 120, 240, 300, all expotential. Short ones work as a signal, long ones as a trend indicator.
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