Breaking through the MA briefly before returning to the trend

Granville's Rules outline eight key trading signals—four buy-side and four 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 introduces potential buy signal 2 and potential sell signal 6, which appear when the price moves against the moving average, falls below the MA (breaks out), and then returns to the trend.

Potential Buy Signal 2
A potential buy signal is generated when the moving average (MA) trends upward, and the price initially falls below the MA. Subsequently, the price rebounds and crosses the MA from below to above, indicating potential upward momentum.

Potential Sell Signal 6
A potential sell signal occurs when the moving average (MA) trends downward, and the price sharply rises above the MA before falling back below it, suggesting potential downward momentum.

Let’s look at the potential buy signal 2. First, we’ll introduce the features of the price movement after the signal appe

Above, we can see the GBP/JPY candlestick chart, with potential buy signal 2 appearing four times. First, after signal A appears, the price moves up, but the action is not sustained. The trend falls to the same extent as the previous rise, returning to the MA level again. After signals B and D appear, the trend surges and rises significantly without immediate reversal or decline.

However, the price barely rises after signal C appears and falls below the MA; this is known as a false signal. In this example, we notice several patterns in the upward trends and periods.

Let’s look at potential sell signal 6 and the price movement after it appears.

Above, we can see the GBP/USD daily candlestick chart, with potential sell signal 6 appearing three times.

After signals E and F appear, the price moves down but then returns to the MA. A very different movement follows signal G. The price does not fully return to the MA after falling and then moves down again after consolidation. This example also shows various downward movements and periods.

Potential Buy signal 2 and potential sell signal 6 indicate that a return to the original trend will follow a low or a rebound. Although the signal is expected to follow the original trend, it may last for some time. The price can return to the MA or become a standard false signal, which requires extra attention.

Let’s look at a simple trading strategy rule using potential buy signal 2: enter when the price crosses the MA upwards and close at the recent high.

Let's see what happens when trading with this rule at A, B, and C when potential buy signal 2 appears.

You close at a profit by continuously rising to the most recent high at A (around 800 pips). At B, the price movement reverses and slides to the recent low, where a stop-loss is triggered. However, even after the stop-loss, another opportunity may arise, so you must be prepared. Immediately after the stop loss at B, there is a potential buy signal 2 at C. The price rises sharply this time and successfully closes at a profit (around 650 pips).

Now, let’s look at the trading strategy of potential sell signal 6.

If this rule is followed when trading D and E with potential sell signal 6, both quickly fall to the recent low, resulting in a successful closing in profit (about 170 pips for D and 220 pips for E). This is an example of rebounding and selling in a downward trend.

However, please note that it's crucial to recognise that market dynamics can shift, and prudent risk management may involve securing profits at opportune times rather than relying on prolonged price gaps. It is also important to note that relying solely on signals could be subject to error, time gap, false signals or changes in market conditions.