The Zone Trade method is essentially made up of three moving averages:
- The 50 period simple moving average
- The 8 period exponential moving average
- The 20 period exponential moving average
Determine market direction
The 50 period moving average is used to determine the market direction. We will only be looking for short trades when the price is trading below the 50 period moving average and we will only be looking for long trades when the price is trading above the 50 period moving average.
The 8 and the 20 period moving average will help to determine when to enter the market. The space in-between them form 'The Zone', which is the area on the chart where we will look for an entry into the market.
So, if the price moves into the space between the 8 and 20, then a trade is setting up and we'll look for an entry and whether we go long or short will determine whether the price is above or below the 50 period moving average.
It is prudent to take note of the angle and the separation of the moving averages. A nice angle of 45 degrees and a good separation is usually a good sign of strong trend.