Guide to Granville's moving average trading rules, potential buy signal 4, and potential sell signal 8. Technical analysis, market trends, and trading strategies.
How to use Moving Average(MA) to trade - based on Granville's Rules - Potential buy signal 4 and potential sell signal 8
Determining the level that deviates significantly from the moving average
Granville's Rules outline eight key trading signals—four potential buy-side and four potential sell-side—based on the relationship between price and the 200-day moving average (MA). These signals are widely used in technical analysis to identify trend reversals or momentum shifts. While they are often illustrated with conceptual charts, applying them to real-world data and actual charts is crucial for practical analysis.
This article highlights two key trading signals: Potential Buy Signal 4 and Potential Sell Signal 8.
| Potential Buy Signal 4 | Occurs when the price falls significantly below the 200-day MA but then shows signs of reversing, suggesting a potential buying opportunity. |
|---|---|
| Potential Sell Signal 8 | Occurs when the price rises significantly above the 200-day MA, indicating that the asset may be overbought and due for a correction. |
Let’s analyse potential buy signal 4. First, we’ll show the price movement after the signal appears.
Potential buy signal 4 in a EUR/JPY chart. Source: TradingView
Above, we see the EUR/JPY daily candlestick chart, with potential buy signal 4 appearing twice. After signal A appeared, the price returned to the MA but it reversed and declined midway. After that, it moved upward again and finally returned to the moving average. However, after signal B appeared, the price rose to the MA, broke through, and continued to move upwards. As a result, the downtrend shifted to a strong uptrend.
One feature of this price movement is that when a trend is ongoing, it may change near the end of the trend.
Let’s look at potential sell signal 8 and the price movement after potential sell signal 8 appears.
Potential Sell signal 8 in a EUR/USD chart. Source: TradingView
Above, we see the EUR/USD daily candlestick chart, with potential sell signal 8 appearing twice. After signal C appeared, the price returned to the moving average several times, but instead of falling all the way, it returned to the uptrend, and the deviation increased again. In contrast, signal D was immediately followed by a downtrend towards the moving average. This was like the situation after signal C appeared, where the price did not return to the MA and the price deviation increased further, requiring extra attention.
Potential Buy signal 4 and potential sell signal 8 are trading signals that the price returns to the MA after deviating significantly away from it. Such trades are contrary to the general trend, so it is difficult to determine when to enter the market.
In addition, after the signal appears, the trend usually does not return to the moving average and is likely to return to the original trend. If you trade with potential buy signal 4 and potential sell signal 8, you should manage your intraday trading cautiously.
Trading strategies
Here are some trading strategies to use with potential buy signal 4. The average candle is used to determine the entry point. It must be noted that a significant deviation from the MA means that the trend is strong and likely to continue. You should place a stop-loss limit order and strictly observe intraday trading rules.
| Entry | Potential Buy when the blue line changes to red (average candle) after the MA deviation moves upward from the bottom. |
|---|---|
| Exit | Close when the blue line changes to red (average candle). Stop-loss limit orders are placed at the latest low. |
Potential Buy signal 4 trading strategy. Source TradingView
When trading at A and B, where potential buy signal 4 appears, both on the decline and rise, you make a profit (about 60 pips for A and about 200 pips for B). In this example, you profit more from a strong rally of B, where the deviation is more significant.
Now, let’s analyse the trading strategy of potential sell signal 8.
| Entry | Potential Sell when the red line changes to blue (average candle) after the MA deviation moves downward from the peak. |
|---|---|
| Exit | Close when the blue line changes to red (average candle). Stop-loss limit orders are placed at the latest high. |
Potential Sell signal 8 trading strategy. Source: TradingView
What is the result of using this rule to trade at the C and D of sell signal 8? Despite the peak, the decline is slighted at C, with a profit of about 35 pips. After entering at D, the trend immediately starts to decline, with a profit of about 20 pips. However, when using this strategy, if the trend continues to peak, you can consider potentially selling again when the red line turns blue next time.
However, please note that it's crucial to recognise that relying solely on signals could be subject to error, time gap, false signals or changes in market dynamics. Prudent risk management may involve securing profits at opportune times rather than relying on prolonged price gaps.
