Month: December 2023

Introduction

Traders nowadays have an almost infinite number of technical analysis tools at their disposal with technology playing a vital part in bringing them to the screens of retail traders worldwide too. This vast availability of indicators, however, does not mean that traders cannot create new ones or adapt old ones to better fit their trading style and strategy. The Displaced Moving Average is a great example of this and, just as you might have guessed, is also the topic of this article.
We are about to find out what the Displaced Moving Average is and how to make it part of your strategy.

What is the Displaced Moving Average?

Created as a variation of the simple moving average (SMA), the Displaced Moving Average (DMA) is a technical indicator widely used in trading to analyze market trends from a different perspective on market momentum although many traders also employ DMA as part of their strategy to identify potential entry and exit points.

The DMA involves traders shifting the SMA forward or backward in time on their chart to create a displaced version of the average. By doing this, the DMA visually separates the moving average line from the current price action pattern, allowing traders to compare the price’s relationship with the displaced average line.

Let’s start by saying that the SMA is the arithmetic mean of a specific number of data points over a given length of time. For example, a 20-period SMA (SMA20) calculates the average closing price over the last 20 periods. On a chart, the SMA is almost always represented by a colorful line above, below, or across the candlestick depending on the time frame.

Once the definition of SMA is clear, we can carry on and say that to calculate the Dispaced Moving Average, traders need to choose the desired time displacement and apply it to the SMA formula.

By applying a displacement value to the SMA, traders are able to effectively shift the moving average to the left or right on the chart as they prefer and can do this in any number of periods, allowing them to customize the DMA based on their needs, analysis, and trading strategy.

Why would traders want to use a Displaced Moving Average rather than a Simple Moving Average?

Distorting and interfering with a good old technical indicator could seem foolish to some people but there are many good reasons for traders to do so. In this specific case, the main reason why so many traders also use the DMA in their analysis is to smooth out price fluctuations and identify potential trends. It helps traders to filter out short-term noise and focus on the broader market trend instead.

By visually separating the DMA from the price, traders can see if a stock price is trading above or below the displaced average which, in itself, can be an insight into many other pieces of information. However, in a broader sense, it is commonly accepted that price above the displaced moving average suggests a bullish market sentiment, indicating potential buying opportunities, and that, conversely,  price below the DMA signals a bearish sentiment, suggesting possible selling opportunities.

5 simple DMA Strategies you can try right now.

DMA Crossover Strategy

This strategy involves using two DMA lines, one representing a shorter time frame than the other. When the shorter DMA line crosses above the longer one, it generates a buy signal and vice-versa.

Displaced Moving Average Reversal Strategy

With this strategy, traders analyze the price action in relation to the displaced moving average. When the price crosses above the DMA line, it indicates a potential bullish reversal and generates a buy signal. When the opposite happens, it should indicate a sell signal.

DMA Breakout Strategy

Traders can use DMA lines to identify potential breakouts too. They wait for the price to close above or below the DMA line to confirm a breakout. A candle close above the DMA line suggests a bullish breakout, while a close below it indicates a bearish one.

DMA Trend-following Strategy

This strategy involves confirming the overall trend using DMA lines. If the price is consistently trading above the DMA line, it suggests a bullish trend. Conversely, if the price is trading consistently below the DMA line, it suggests a bearish trend. Traders can then take trades in the direction of the trend.

DMA Support and Resistance Strategy

DMA lines can also be used to identify support and resistance levels. Traders observe how the price reacts when it reaches the DMA line. If the price bounces off the DMA line, it acts as a support level. If the price fails to break above the DMA line, it acts as a resistance level. Traders can then take trades based on these support and resistance levels.

The Author’s Way of Displaced Moving Average!

In the main image of this article, I represented the way I personally like to use the DMA.

Very simply, I draw three different DMA lines on the chart, set them to my preference, and wait for price to cross all three lines in either direction.

The first red candle that opens and closes below all three lines indicates a strong bullish bias. Similarly, the first green candle to open and close above all three lines signals a possible bullish move.

Remember

When using the displaced moving average, remember that different displacement values will show different results. You need to experiment with different periods to find the value that suits their trading style and the specific market they are analyzing.

Well, best of luck, traders!
I hope this helps.

Introduction

Fibonacci Retracements are powerful technical analysis tools based on the Fibonacci Sequence which are widely used in the financial trading of virtually any and every asset.
Many traders use technical indicators – and sometimes entire strategies – built upon Fibonacci Retracements, while many others use the retracement levels as a guide to set their stop-loss and take-profit orders. But how can a sequence of numbers discovered in medieval times have any applications in trading today?

In this article, we will explore what Fibonacci retracements are, how they work, and how traders can make them part of their trading strategies.

What is the Fibonacci Sequence?

The Fibonacci Sequence is a mathematical sequence of numbers discovered in India and brought to Europe by Leonardo Fibonacci sometime during the 13th century.
The sequence begins with  0 and 1 and carries on with each following number being the sum of the previous two; so.. 0, 1, 1, 2, 3, 5, 8, 13, 21, and so on.
Mathematically speaking,  the Fibonacci Sequence and the relation between the numbers it contains can be found reflected everywhere in nature (for example in the shape of chicken eggs, many plants, flower petals as well as galaxies, and much more) but the reason it’s so interesting to traders is, intuitively, a different one.

What are the applications of the Fibonacci Retracements in financial trading?

In financial markets, traders use the ratios, derived from the Fibonacci Sequence, to predict the range and the extent of potential price retracements. Prices corresponding to these ratios are referred to as “Fibonacci Retracements”.

There are many ways and variations to use the Fibonacci Retracements and there is a myriad of technical indicators adopting each a slightly different way of showing the retracement levels on the charts -however- they are all more or less based on the same principle and pretty much all work in a very similar way.

Fibonacci retracements are plotted on a price chart as horizontal lines indicating potential support and resistance levels. The two main points used to draw these lines are the Swing High and the Swing Low. The Swing High represents a peak in price, while the Swing Low represents a trough. A retracement is then drawn between these two points, dividing the vertical distance by various Fibonacci ratios.

Traders use the Fibonacci Retracements’ levels to establish potential entry and exit points for their trades as well as their stop-loss and take Profit orders.
Naturally, even when using any Fibonacci retracement indicator, traders would still examine and confront the results of additional technical analysis tools (such as candlestick patterns and trend indicators), to confirm the probability of a reversal or continuation before opening a position.

What are the key Fibonacci Retracement Levels:

Fibonacci retracements rely on percentage levels derived from the Fibonacci sequence. The three most prevalent levels are 38.2%, 50%, and 61.8%. These are thought to represent levels of support or resistance, when price may stall or reverse. Traders also employ additional Fibonacci levels, such as 23.6% and 78.6%, in order to gain better insight into further price movements.

How are Fibonacci Retracements used when trading?

As we said, there are many methods to trade using Fibonacci Retracement; what follows is one of the most basic and most common of such methods.

To use and make Fibonacci Retracements part of your trading strategy, it must be remembered – and we can’t stress this enough – that no strategy should be ever based upon one single indicator and Fibonacci Retracements are no different.

In order to ensure to draw the Fibonacci Retracements in the right direction, a trader needs to consult and compare the results of other market analysis tools (technical and/or fundamental) to identify the current trend and a bias on the likelihood of potential changes.

What’s next?

Once that is done, a trader needs to identify the Swing Points (the high and low points on the price chart that mark the start and the end of significant moves) and use a Fibonacci Retracement tool to draw the lines from the swing low to the Swing High (in an uptrend) or from the swing high to the Swing Low (in a downtrend).

As you draw the line according to the current trend, most Fibonacci Retracement tools will display horizontal lines across the chart; each of these represents a different Fibonacci Sequence ratio and therefore a different Fibonacci Retracement level.

With the Fibonacci Retracement lines across the charts on his or her screen, a trader should now spend some time analyzing how price reacts when approaching each retracement level.
Very often, support and resistance areas can occur near these levels as well as retracement and price reversals.

Before opening a position, a trader should look for confirmation and confluence with other indicators. Confirming signals from multiple sources can strengthen any trading decision. This is why it’s advisable that traders combine Fibonacci Retracements with other technical indicators or chart patterns to increase the probability of the trade being successful

Let’s finish it off!

Once all of the above is done, all a trader needs to do at this point is to follow the results of his analysis and use the Fibonacci Retracement levels to set entry and exit points for his position (as well as stop-loss and take-profit orders) whilst keeping in mind that support and resistance levels, price reversals, bounce-backs, and pull-backs are all likely to occur around the Fibonacci Retracement levels.

Hope this helps!
Happy trades!