Granville’s 8 Rules for Moving Average (MA) | Forex Indicators Tutorial
One of the most common problems many new forex traders may face is feeling confused about volatile prices and not knowing the best time in point to buy and sell. In light of this, ZFX wishes to introduce to new investors a technical indicator suiting their needs – the moving average – and illustrate how the moving average and Granville’s 8 rules can be used in pairs to determine the best trading signals.
Is technical analysis important for forex trading?
Investors should know that, if they have involved in forex trading, technical analysis is quite an important indication to guide trading transactions. It often enables investors to grasp the utmost precise turning point to estimate either a breakout or a rebound if technical analysis is used correctly and such “marvel” is one of which fascinates the forex traders.
What is technical analysis?
If one predicts the mid-and-long-term price trends based on the company’s well-being and overall economy’s rise and fall as well as the economic cycle, and that is what considered as fundamental analysis. Then, technical analysis means using the graphical analysis to anticipate the variations of short-to-long term prices solely based on the historical performance of the price trends.
The moving average (MA): an elementary technical analysis indicator
Here to introduce the most popular technical analysis indicators: the moving average (MA). MA is the most common trading indicator particularly widely used in round the clock forex trading. Investors can estimate the trends by obtaining the averages of its historical prices with a simple concept. If the current price is higher than its historical average, then it is a relatively strong and up-going momentum. As such, it can be estimated as an upturn. For example, a 5-day MA’s value is the estimation on the average of the closing prices in the past 5 trading days. The larger the base term number, the longer the MA, the longer the price trend and vice versa.
In general, it is the user who determines the value of MA but usually, 5-day, 10-day, 20-day, and 50-day ones are much preferable in the market.
The advantages of MA
MA can be a good reference, including using the sequences of the long and short terms MA and its golden/death crossovers for the investors to estimate the trend and its support/resistance levels from its subsequent callback test.
MA is quite effective in tracking the overall trend, especially when there is a strong and obvious movement. Since MA has a relatively simple concept, it is the best suited for the forex trading beginners.
Keep an eye out for the golden/death cross
Simply speaking, when the shorter-term MA crosses above the longer-term MA, it is known as a golden cross, and if it crosses below the longer-term MA, it is known as a death cross. In tradition, if a 50-day MA crosses above the 250-day MA, it will be considered as a golden cross. On the contrary, it will be a death cross if the 50-day MA crosses down the 250-day MA. However, times change and the current movement of the financial markets is generally short and hasty, in which investors are recommended to adjust the base term number as a defined reference.
- In terms of the mid-term MA, it takes 20 and 50 as the base term number.
- In terms of the short-term MA, it takes 5 and 20 as the base term number.
Death cross example
When a death cross is shown on the MA, and the price trend keeps falling, representing a short tendency. Investors should try short selling as a strategy at this time and have short trend trade when cross falls fast below the previous low position and declines.
The above example also shows that when the price returns to the MA position, there will be obstacles and the return resistance occurs. Such a condition reflects each of the MA plays a role.
Building strategies with Granville’s 8 rules
Joseph E Granville, the U.S. investment expert, observed the trends of both prices and MA, and summarised them into 8 situations, which later became the rules that help to establish trading strategies.
What are Granville’s 8 Rules?
In general, Granville’s 8 Rules are a technical analysis indicator derived from MA, which has included four long and short signals as rule. The principle is to use the resistance and support from MA to find out the best entry position points for trend trading investments.
4 buying signals:
- Breakout Buy – When the price rises from the bottom and breaks the MA of tendency level, it is a buying signal.
- Call-back Buy – When the price goes beyond the MA and the call-back does not fall below the MA can be considered as a buying signal.
- Fake Breakout Buy – The price falls below the MA, however, if the MA is still rising and the short-term price goes back upon the MA, it is a buying signal.
- Off-buy – When the price keeps falling and accumulates certain declines, and it begins to deviate from the moving average, it is a buying signal.
4 selling signals:
- Breakout Sell – When the price falls from above and breaks the MA of tendency level, it is a selling signal.
- Bounce Sell – When the price goes below the MA and it rebounds but does not exceed the MA, it is a selling signal.
- Fake Breakout Sell – The price rises and breaks the MA, however, the MA is still falling and the short-term price falls again below the MA, it is a selling signal.
- Off-sell – When the price keeps rising and accumulates certain increases and starts deviating from the MA, it is a selling signal.
The figure below shows that after an upturn is formed, with the occurrence of the golden cross, it often fails to break the longer-term MA when doing a call-back test on it. Therefore, investors can predict the upturn and thus be able to know the major trend —— keep on moving! The circled position in the figure is the key operating point predicted according to Granville’s 8 Rules. Such a trading indicator makes it easier for learners to grasp more opportunities for trading. The reliability of the entire trading strategy can be enhanced if together using the golden cross/death cross.
The drawbacks of Granville’s 8 Rules
The cross-use of MA and Granville’s 8 Rules described above can show the effectiveness and be useful only in the cases where the trending condition is strong. However, in forex trading, there are also frequent swings or finishing stages. At this time, MA does not provide a good guiding effect if investors do not take any other approaches to estimate the market; it is easy for them to suffer from losses.
Range of oscillation: Novice-avoid operation
As shown from the USDJPY chart above, a range of oscillation formed before the trend occurs, and it is quite unclear to figure out the direction of movement within the range but noted that the MA seems like knotting. That is the phenomenon called the tangled MA. It represents a consolidation of the market, and the MA does not have much support or resistance effect at the time. It is generally suggested new traders better use fewer operations in such market conditions or to establish ranges by trend lines, and wait for a breakout.
With the above-mentioning figures, it is believed that all new traders already have a preliminary understanding of such a trading indicator. It is a considerably basic concept that is easy to understand, and useful for forex trading arrangement. However, investors should pay attention that forex trading is what requires a series of disciplined long-term strategic arrangements, and such technical indicators may have mistaken estimation sometimes. Therefore, on-going risk management is also quite important.
Risk Warning: The above content is for reference only and does not represent ZFX’s position. ZFX does not assume any form of loss caused by any trading operations conducted in accordance with this article. Please be firm in your thinking and do the corresponding risk control.
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