Conventional and straightforward way for capturing value is to build moving average and derivative of moving average – Bollinger-Bands indicator. Moving average is considered to represent value, borders of Bollinger Bands are considered to represent 1 standard deviation from average:
if we take moving average as a substitute for value, we are risking to get many misleading signals.
Why?
It occurs because of what I call «Inequality principle»
It claims: «Different price levels are not equally important for the market».
Do you feel what I’m talking about? Moving average can’t distinguish what price levels are more important for the market – it’s responsibility of a trader. Missing piece is market logic.
But period in the red circle was a final auction, overall trend was rising and market was no longer able to stay inside of a trading range. When market lacks selling liquidity, when nobody is going to sell, it start advertising higher searching for sellers.
We often see that price is leaning to higher extremes and holds on higher prices.
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