Granville’s - moving average trading rules: Potential buy signal 3 and potential sell signal 7 explained

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 highlights two key trading signals: Potential Buy Signal 3 and Potential Sell Signal 7. These signals are identified when price movements diverge from the moving average (MA), break below it, and subsequently revert to the trend.

Let’s look at potential buy signal 3. First, we will look at the price movement after the signal appears.

Above, we see the EUR/JPY daily candlestick chart, with potential buy signal 3 appearing twice. After signal A appears, the price returns to the uptrend and goes on increasing. In contrast, after signal B appears, the price moves upward but immediately reverses and falls below the MA. As this example shows, potential buy signal 3 does not necessarily guarantee a steady uptrend; this scenario requires extra attention.

Now, let’s look at potential sell signal 7 and the price movement after it appears.

Above, we have the EUR/USD daily candlestick chart, with potential sell signal 7 appearing periodically. Between F and G, there is a break above the MA, but the signal here is potential sell signal 6. When the signal appears regularly like this, it can be identified as a potential selling opportunity after the correction.

Potential Buy Signal 3 and Potential Sell Signal 7 share similarities with Potential Buy Signal 2 and Potential Sell Signal 6, as they both involve the price returning to the trend shortly after a move near the moving average (MA). However, in Signals 3 and 7, the price does not cross the MA. Instead, the correction ends as the price approaches the MA, and it then rebounds for Signal 3 and declines for Signal 7 in the direction of the trend.

These signals typically occur in well-defined trends and are often accompanied by multiple signals within a single price movement. While these signals appear more frequently compared to others, they also carry a higher risk of generating false signals. As such, traders must exercise extra caution and use additional tools or confirmations when acting on them.

Let’s analyse the trading strategy rule with potential buy signal 3. The crucial factor here is to use the average candle to determine the timing of the entry point. Enter when the average candle approaches the MA and the blue line changes to the red line, and take profit at the recent high.

Let’s have a look at this rule in practice. In the chart above, potential buy signal 3 appears twice at A and B, both are steadily rising, and profit can be taken at the recent high (about 240 pips for A, about 320 pips for B). The advantage of this strategy is to use the average candle (from the blue line to the red line) to determine the rise from the low.

Now, let’s analyze the trading strategy of potential sell signal 7.

If this rule is followed, when trading at C and D where potential sell signal 7 appears, both prices will steadily decline, ensuring profits of about 200 pips for C and 150 pips for D. Then the price rises again near the MA, which can also be identified as a signal. In this strategy, when such a trend occurs, we find several opportunities to potentially sell on the corrections.

However, please note that relying solely on signals could be subject to error, time gaps, false signals or changes in market conditions. It is also 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.