The third pattern in this series is the eight-bar open/close moving average pattern. It is a simple pattern that is based on the relationship between the opening and closing price of a price bar. Typically, market lows are preceded by a period of accumulation while market highs are often preceded by a period of distribution. One way to determine pending price tops or bottoms is to monitor the relationship between the opening and closing price of a market over a given period of time. If the close of a given price bar is higher than the open of a given price bar for a given period of time, then a low is likely. If the close of a given price bar is lower than the open of a given price bar for a given period of time, then a high is likely.
The best way I have found to monitor this pattern is by using an eight-bar moving average of opening prices versus an eight-bar moving average of closing prices. Those who have attended my seminars and my former one-on-one mentoring students will remember the five-bar open/close indicator that I developed many years ago. Since then I have used the method considerably, during which time I have refined it to the eight open/close pattern with a variety of followthrough approaches. Note that this method is not totally mechanical or objective.
I offer it to you because it is a very effective method for spotting short-term price trend swings in active and trending markets. is one example of the eight open/close pattern. As you can see, although it is a lagging indicator, it is fairly good at spotting trends
Setup and trigger
Note that the open/close indicator is not a trading system. It is merely a method for determining the relative strength or weakness of a market and/or the timing of a short-term trend change. It is best when used with another short-term indicator
Follow-through
There are several types of follow-through for this method. Note that this is a trading method as opposed to a trading system. By this, I mean that a small amount of judgment is required as opposed to the purely mechanical procedures used in a trading system. There is more about this later on when I give you my suggestions for the application. Here are four types of follow-through for this method
Because this method is not a mechanical trading system, but rather a method for determining short-term trend changes, you cannot use a rigid approach in trading with this method. In other words, this method is not totally objective compared to the methods that have been taught in previous lessons.
Review
You have a simple method for determining and taking advantage of short-term trend changes using the eight open/close patterns. I emphasized that this pattern should not be considered a trading system but rather a method or indicator. Please take a few minutes to answer the questions below. Note that this quiz requires more attention than some of the earlier quizzes. Take your time.
Last word
Instructions: Mark the signals, trades, and exits according to your best estimate. You need not indicate the exact prices at which trades were triggered or closed out unless you have access to a chart with exact prices. For items 1 through 3 find and mark the eight open/close buy and sell triggers.
