I was first introduced to displaced moving averages when I was studying the work of Fibonacci expert Joe Dinapoli. Taking it a step further, we can combine 2 displaced moving averages and use them to form a channel. With that, we can then design a strategy with them.
There are different types of moving averages you can use to form a channel trading strategy but the displaced averages (shifted) are unique.
Think of a standard moving average such as the 20 SMA. We can then shift it forwards or backwards (mostly used for cycles of the market) a set number of days known as the displacement.
For this trading strategy, we are going to pull from the work of Paul Ciana who included it in his book back in 2011.
Trading Rules For Displaced Moving Averages Channel Strategy
Our use of the displaced moving averages as part of a trading strategy has a few uses:
- It can give us our bias in regards to the direction we want to take a trade
- It can be used as a trigger into a trade in the direction of our bias
- It is also used as a setup indicator
You have to admit that something so simple as a moving average can have such a wide range of uses
We are using the settings that Paul used for his DMA channel:
- 6 period average of highs displaced by 4 to the right
- 6 period average of lows displaced by 4 to the right
You can see that layout here on the weekly chart of the Forex cross GBPJPY
We can get a lot of information to form the basis for a trading strategy by looking at this chart especially about our trading bias. The secret is to use a higher time frame as your bias for trade direction and lower one for your trading.
- Using the slope of the channel, we can see here that price is sideways. On lower time frames you may choose to stand aside. On this time frame, price action Forex traders may look to buy breaks of the range depending on context
- Slope of channel turns up so we would be looking for longs on lower time frames
- Channel down equals short
- Another method that does not have as much of a lag component is to wait for price to trade above/below the channel
Review Of Displaced Moving Averages Channel As Trend?
There is a lag, like all trading indicators, and the displaced value gives this a little more lag. Using the slope of the channel is viable and may clue you into the strength of the trend depending on how far price has pulled away.
Using the simple version where you look for price to trade fully above the the upper or lower moving average as a bias could also work but you may want to ensure the candle is a strong momentum candles on first break.
Entering A Trade Using This Trading Strategy
My opinion is that you want all of your Forex trading strategies to be as simple as possible. This will allow your method to be a lot more adaptive to different market conditions. One thing about the displaced moving average trading strategy is that it is fairly objective.
This chart is the 4 hour chart of the same pair and place on chart as the first chart. We are looking at location #4 to illustrate how to trade this strategy. The reason I went to the four hour Forex chart is because the daily was so strong, there were no pullbacks to trade!
The vertical blue lines indicate where price either traded above the channel on the weekly (the first line) or where the slope turned upwards (the second line). It is VERY clear that waiting for the slope will have you missing a fair number of opportunities.
The green dashed lines are where price traded into the channel and then eventually traded and closing price was outside the channel. These are all buy stops of the highs.
Conservative Traders: You could wait until the entire price bar/candle trades outside the channel.
Notice the blue horizontal lines. These are marking previous resistance zones and that same price level is potential resistance if price trades back into it. This is another form of confluence that we can use with this trading strategy.
Are Displaced Moving Averages A Good Trading Strategy?
This is a simple trading strategy especially if your swing trade markets like Forex. It has clear cut entry and trend signals which many traders have problems with.
I think the displaced moving average channel frames price quite well and can focus your attention to certain locations on charts to look for trades. It lends itself very well to support and resistance trading as well as highlighting price compression that is needed for good breakout trades
You still need……must have……a sound trade management approach and follow position sizing rules where one loss will not wipe you out.
In the end, test this trading strategy. I’ve always been a fan of displaced moving averages and this channel trading method puts them to good use.