Trend lines and moving averages are ones of the most widely used tools in technical analysis. Wherever you look - all publicized analysis has some trend line or moving average of sorts (further in the article – TL and MA). Even major banks love them. So how did I came up with such “preposterous” conclusion, stating that MA's and TL's better to be ignored in technical analysis!?

The Big Conspiracy. I’m not a big fan of conspiracy theories, but when it comes to something delusional that masses believe (or just don’t bother to think more deeply about) and for other side doesn’t cost much physically or financially to maintain that delusion (like games in politics for example), than why not? It’s not necessarily some specific person’s or a specific group’s evil plan – just a natural flow of common believe which formed “ages” ago. And no one with a true knowledge is interested to break that delusion as himself makes a living from this common understanding.

Major banks basically are Market Makers (for their clients – directly, and for the rest of the FX participants – indirectly). Because they always take other side of your trade, the conflict of interest happens of course. And it doesn’t take much for them to maintain this common believe in TL’s and MA’s.

Just think for the moment – who are these “dump” traders who take opposite side of your trade at some major TL or MA? If everyone would sell at the same spot – price surely would drop immediately, but 50% of the times – it doesn’t or overshoots significantly before turning. Why?

Stop hunts. Market movers often target those week positions around major MA’s and TL’s to fake-spike them and proceed to where it initially targeted to. Sometimes it may look, like TL’s and MA’s got respected even if they got breached on the spike. But what really happened – those got used to gather additional liquidity, to get better price and to widen the range. Generally stop hunts or fake-spikes meant to widen the range before real movement starts, which can lead to either direction. In this way – market mover enters at better price and makes others to re-enter later at worse price and do the pushing in to the “right” direction for him.

Liquidity clusters. Often in ranging environment seems like price moves randomly and one still could draw several TL’s and find some coinciding points, when is what really happening – market movers accumulating their positions without pushing price away. This process proceeds like this: market mover executes big order (let’s say buys $1 bln) and it pushes price some 10 pips immediately, then others seeing possible start of the movement enter also with additional 0.5 bln, then market mover sell 1.5 bln and price comes back to where it started. End result: market mover increased his position without pushing price away (thus didn’t revealed its intentions to the crowd). Price action observer may see “buying” pressure when exactly the opposite is happening.

Market Movers don’t trade moving averages or trend lines – they trade liquidity and probabilities. Places around weak support/resistances are packed with liquidity for those who want to push further. And if you play with multibillion positions – you have to push against the current or otherwise your positions will get filled with huge spreads and after initial spike in the direction where this order pushed – not much of other participants will be left to push price even further. But if you (as a market mover) bet against the level and make a breakout and then suddenly close your position at the next cluster of liquidity (stop loss orders) – you attract price back to where movement started and fill same order again, but this time because breakout happened, others will fallow and push the price for you in your direction!

Figure 1.0. Looks like 100 SMA was “respected”, but the true battle was for previous session lows, higher low sequence, and retest of the middle of the broken range.

You can slice it however you want and it will work. Either, in well trending or ranging environment, you can put whatever deviation point and it will look tradable/profitable on the historic PA. For example, if trend is going in stable and equally proportioned manner with every HH or LL created after 50% retracement, or any other retracement point (61.8, 75 or whatever) you can fit any moving average or indicator and it will look, like price reacts to it, when all you need to do is to enter every time price retraces below the middle of its recent range and exit every time new high or new lows has been made. Its risk and money management that works – not MA’s or TL’s ( “A Simple yet Essential Risk and Money Management Principles”). Same goes in ranging environment – sell high, buy low, or slice the range in any mathematical proportions (quarters let’s say) and you can trade as much sufficiently or with greater results as any magical witchcraft tool that you can come up with.

In my older article “Session breakout trading method” I explained interesting behavioral pattern which can be traded purely on price action developments without much of any visual aids.

TL’s and MA’s always move – even if PA doesn’t. If price consolidates long enough – some MA or TL will approach it sooner or later. Often price stalls awaiting next session and more liquid conditions to appear before moving further. It is quite common for NY session to hesitate and postpone unfinished movements for next European session while during consolidation various unrelated technicals may appear. People tend to over-interpret price action developments during consolidation which produces misleading conclusions.

Where is the risk and where are the profits? Another complicated aspect in MA’s and TL’s trading is that stop loss limit and profit target placement is completely individual and subjective thing. How much overshoot beyond the level should be tolerated (as it is almost inevitable on every test) and where is the next turning point? Predetermining risk limits and profit targets around moving averages is especially speculative. Naturally – recent price action developments comes to help, but why than not to use price action analysis for an entry and exits in the first place!?

None standard settings. That’s the most ridiculous thing that one could do – go with none standard settings. If I would choose to trade on some indicator, MA or TL – at least I would like to see what everybody else sees which increases probability that crowd will enter at the same spot at the same time and it will move the price away. But if one has none standard setting and sees “something” what anyone else don’t – where does it lead to? To draw a TL correctly is very important to keep candlesticks/bars as thin as possible and to keep every drawing for every time frame separately or otherwise the angle will change and it will displace other end of the TL significantly (See figures: 2.0., 2.1., 2.2.). These errors may become huge on extended time periods (outside of intraday range). And what’s up with all those 54, 12 and similar MA’s? Any short term moving average goes at the middle (more or less) of the range, but it doesn’t mean that price reacts to that particular MA.

Figure 2.0.

Figure 2.1.

Figure 2.2

First test is the most probable for a rejection to happen and it creates an exception to the rule of sorts. It is the only high probability opportunity to succeed trading freshly formed TL, or MA that hasn’t tested for a very long time. More about methods I used to identify future TL’s - in my older article “Trading imaginary trend lines”.

The Other way around. If 20-40 pip overshoots would be discounted as breakouts, one could find, that major MA’s and TL’s maybe get “respected” more often than 50% of the times. In some cases, when price approaches TL/MA from a long distance – some precautionary profit taking may add sufficient enough opposing pressure to already existing one to actually stop the price and make it bounce/reject the level. In other cases – MA’s and TL’s just coinciding with significant price action levels – key highs/lows or middles of the broken and existing ranges. So if one would use major TL/MA as a reference point – not an inevitable entry point and look for opposite outcomes to the possible test than a first-day newbie would expect, maybe something good would come out of it. Look for breakout scenarios – the continuing and the fake ones. What other technicalities lies beyond that TL or MA? Maybe is worth waiting for some 20-40 pip overshoot and then try to fade the movement?
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