Perfect order takes places when the moving averages are stacked in a sequential order. For example, suppose you are using a three simple moving average system, 10 day SMA, 20 day SMA and 50 day SMA. In an uptrend, a perfect order world be when the 10 day SMA is above the 20 day SMA and the 20 day SMA is above the 50 day SMA. In the same manner, the 100 day SMA should be below the 50 day SMA and the 200 day SMA should be below the 100 day SMA.
On the other hand, in a downtrend, the reverse sequential order of the moving averages should be found with the 200 day SMA the highest and the 10 day SMA the lowest. This perfect sequential order in the moving averages is a strong indication of a trending market. It also indicates that the momentum is on the side of the trend.
When you find the moving averages stacked in a perfect order, it indicates a strong trend in the market that has the big money behind it to make it continue for the future. These different moving averages serve as multiple levels of support. Perfect order among the moving averages does not happen often but when it happens, you can trade this perfect order with the following rules:
- First scan the charts and find a currency pair with the moving averages stacked in a perfect order.
- ADX should be greater than 20 and trending upward.
- Wait for five candles after the perfect order is formed on the chart to enter into a trade.
- Place the stop loss on the low of the day for a long entry when the initial crossover takes place.
- Place the stop loss on the high of the day for a short entry when the initial crossover takes place.
- Exit the trade when the perfect order breaks and no longer holds.
The ADX is used to optimize the perfect order trading strategy. It should be greater than 20 and trending up. ADX resides vertically either above or below the bar or candlestick chart. This indicator is used to measure the strength of the current trend.
Strong trends have a high ADX readings while a weak trend has low ADX readings. An increasing ADX reading is an indication that the trend is increasing in strength while a decreasing ADX reading is an indication that the trend may be decreasing in strength.