Displaced Moving Average Channel Trading Strategy

Displacing a moving average means shifting the moving average to the right. With two displaced moving averages (DMA), we can form a channel trading strategy.

This displaced moving average channel trading strategy comes from Paul Ciana’s book, New Frontiers in Technical Analysis: Effective Tools and Strategies for Trading and Investing. Paul Ciana is a Chartered Market Technician working for Bloomberg. He is very active in engaging technical analysts to improve Bloomberg’s technical analysis offerings.

The displaced moving average channel consists of two moving averages:

• 6-period simple moving average of bar highs displaced to the right by 4 periods
• 6-period simple moving average of bar lows displaced to the right by 4 periods

Trading Rules – Displaced Moving Average Channel

The rules below are our adaptation of the DMA channel for trading.

Long Trading Strategy

1. Price is above the DMA channel on a higher time-frame
2. Prices are within the DMA channel on trading time-frame
3. Place buy stop order at a tick above the bar that closed above the DMA channel on trading time-frame

Short Trading Strategy

1. Price is below the DMA channel on a higher time-frame
2. Prices are within the DMA channel on trading time-frame
3. Place sell stop order at a tick below the bar that closed below the DMA channel on trading time-frame

Displaced Moving Average Channel Trade Examples

Winning Trade – Long DMA Channel Trade

For this example, we looked at the daily chart of The Procter and Gamble Company. The lower panel shows the weekly chart which is our higher time-frame.

1. Prices moved above the channel and our market bias became bullish.
2. The low of price bars rose and remained above the DMA channel, confirming the bullish bias.
3. This bar closed above the channel but the next bar did not trigger our buy stop order. Around a week later, we had a second signal bar (green arrow). We bought the next day and participated in a solid up trend.

Losing Trade – Short DMA Channel Trade

This chart shows the price movement of DBS Group Holdings Limited listed on the Singapore Exchange.

1. Prices moved below the channel, implying the start of a bear trend.
2. Following our trading rules, there were two profitable swing trades. However, our focus for this example is on the last trade setup that failed (red arrow).
3. Before the trading setup, the lows of the candlesticks on the daily chart went above the DMA channel. This bullish momentum hinted that this trading setup might not succeed like the earlier ones.

The three consecutive dojis after our short entry gave an early warning of the failure of this trade.

Review – Displaced Moving Average Channel

Using the displaced moving average channel on dual time-frame is a sound trading approach.

Moving average channels are useful trading tools because they highlight strong trend movements. Look out for bars that move completely beyond the DMA channel. They highlight powerful moves that you can further analyze for hints of market strength.

Paul Ciana’s book has a lot more information on trading DMA channel, including what the DMA channel slope signifies and how the beta of a stock affects the effectiveness of DMA channel.

A similar trading strategy is Jake Bernstein’s moving average channel day trading setup.

For another trading strategy that uses displaced moving averages, take a look at Bill William’s Alligator system which uses three displaced moving averages.