Moving Average (MA) is a trend line that follows the price action and reveals bullish or bearish conditions. The perfect order setup goes a little bit further. It uses not one, but many MAs and reveals trades when they all point in the same direction.
For the perfect order system, investors use the following MAs:
- 200-day MA
- 100-day MA
- 50-day MA
- 20-day MA
The MA type doesn’t really matter. Some investors use Simple MAs, some use Exponential MAs but in reality, both setups are quite similar.
The chart above has a few MAs; the brown line is the fastest MA (20-day) and closest to the price action, the red line is the 50-day MA, the blue line is the 100-day MA, and the black line is the slowest MA (200-day). They are all SMA (Simple Moving Averages).
What is the perfect order and how to trade with it
As the name suggests, the perfect order forms when all the SMAs line up in the same direction. It shows perfect trending conditions, and investors focus on buying the dip in a bullish trend.
From left to right, the vertical lines show the start and end of the period in which a perfect order occurs. When the 50 MA red line crosses below the 100 MA blue line, the market is considered to be in the perfect order. Therefore, investors sell the first two spikes into the slower MAs, as indicated on the chart above. This is key: only the first two spikes.
If the market has the ability to keep approaching the MA, it is likely to eventually break it. Investors place the stop loss (at the above MA in a bearish trade) and target an appropriate risk-reward ratio.
The EUR/JPY above shows both bearish and bullish perfect order situations. The ability of price to keep approaching the 20 MA in the bullish situation resulted in the price eventually breaking below it. It provided investors with the opportunity to buy the dip into 50 MA. The strategy remains in place for as long as the perfect order remains valid. However, the more its tests the MAs, the weaker the trend becomes.
Investors love the perfect order setup as it only holds true if the market quickly recovers to at least initial levels. The system doesn’t allow areas of consolidation; when consolidation starts, the 20 MA line crosses below or above the 50 MA line and puts an end to the perfect order setup.
- The perfect order setup uses multiple moving averages.
- Investors use both Simple Moving Averages and Exponential Moving Averages.
- If the price keeps approaching a moving average, eventually it should break it.
- Only the first two tests represent good entry opportunities.