Types and tools
Once you have defined your time frame, you can identify the current market type by using a simple set of moving averages. These will act as a representation of price.
By combining a 20-day simple moving average and a 40-day simple moving average, you will have a powerful pair that can indicate price directional bias and reveal the current state of the market. The following are typical interpretations of these indicators:
- The market-type is bullish when the 20-day simple moving average is trading above the 40-day simple moving average.
- The market-type is bearish when the 40-day simple moving average is trading below the 20-day simple moving average.
- The market-type is sideways when both simple moving averages are moving sideways with no constructive movement in either direction, up or down.
These simple moving averages and rules apply to all time frames regardless of the time period. In technical terms, the time period is the parameter you define, while the simple moving averages are the filters you employ.