This is a very effective play; I’ve never run any numbers, but it’s an above 70% win according to Linda B Rashcke, and I agree with her.
And it’s very simple, whenever prices pull back on a declining (advancing) underlying to attack an EMA(20), expect the EMA(20) resistance (support) to hold prices; sell (buy) when the low (high) of a 15 minute bar is breached.
In this first chart, which depicts an advancing CL0604, we see five opportunities:
- On A, I would adapt the above rule to consider breaking out of the channel, by setting my buy stop order a little above the high of the channel. In general, to apply the MA bounce setup wait till the channel has been cleared.
- On B, note that we had a loss on our first attempt, and we’re jumping in with a stop order at the high of its small channel.
- On C, unfortunately, we had a big opening gap when our signal to buy was triggered, we don’t get in, – too much of our potential profits have been taken away by the gap…
- On D, we have a similar situation as in B, we buy on the high of the channel.
- On E, we simply buy on the high of the previous bar.
The second chart, continues CL0604 through the following decline with three opportunities:
- F and G are pretty straightforward, the attacks failed, – reinforced with tests of the highs; we sell on a stop at the low of the previous bar.
- On H, we suffered a loss; and the day closed still attacking the EMA(20). Next day, our signal was triggered, but with a gap, we take no orders for the bounce… But, we could’ve sold the previous Ross hook, which is another story altogether.
Happy trading guys!