1. Introduction

The moving average bounce trading system uses a short term time frame (5 - 10 - 15 minutes) and a single exponential moving average (10 - 20 - 50), and trades the price moving away from, reversing, and then bouncing off of the moving average.

When the price experiences a strong move, it will have a tendency to retrace back to the moving average, but then continue the original move, and it is this bounce that is used by the moving average bounce trading system.

Both the chart timeframe, and the exponential moving average length, can be adjusted to suit different markets. The default trading time is when the market is most active.

2. Open a Chart

Open an OHLC (Open, High, Low, and Close) bar chart of the scrip.

3. Add an Exponential Moving Average: Add the suitable exponential moving average

4. Wait for Price and Moving Average Divergence

Watch the market, and wait until the price has moved away from the moving average. There is no default distance the price should move, but the price bars should no longer be touching the moving average.

5. Wait for Price and Moving Average Convergence

Wait for the price to reverse and move back towards the moving average.

6. Wait for Price and Moving Average to Touch

Wait for the price to touch the moving average, which happens when the price trades at the current moving average price.

For a long trade, the previous price bars should have been making lower lows as the price approached the moving average, and for a short trade, the previous price bars should have been making higher highs as the price approached the moving average. There is no specific number of bars that need to make consecutive lower lows or higher highs.

In the chart shown below, the price touches the moving average on the fourth bar to make a consecutive lower low.

7. Enter your Trade

Enter your trade when the high (or low) of the first price bar that fails to make a new low (or high) is broken. The following list shows the steps required for both long and short entries:

Long Trade

1. Price bars make lower lows
2. Price bar touches the moving average
3. Subsequent price bar fails to make a new low
4. Subsequent price bar breaks the high of the previous price bar

Short Trade

1. Price bars make higher highs
2. Price bar touches the moving average
3. Subsequent price bar fails to make a new high
4. Subsequent price bar breaks the low of the previous price bar

There is no default order type for the moving average bounce trade entry, but the recommendation is a limit order.

As soon as your entry order has been filled, make sure that your trading software has placed your target and stop loss.

8. Wait for your Trade to Exit

Wait for the price to trade at your target or at your stop loss, and for either your target or stop loss order to get filled. The moving average bounce trade can take anywhere from a few minutes to a couple of hours to reach your target or stop loss, and the trade does not use any target or stop loss adjustments (except moving the stop loss to break even at a suitable time).

If your target order has been triggered, then your trade has been a winning trade. If your stop loss order has been triggered, then your trade has been a losing trade.

9. Repeat the Trade

Repeat the trade from step 4, as many times as necessary, until either your daily profit target is reached, or your market is no longer active.