How To Trade Using A Simple Moving Average

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Contents

Moving Average

Contents

DEFINITION

Moving Average (MA) is a price based, lagging (or reactive) indicator that displays the average price of a security over a set period of time. A Moving Average is a good way to gauge momentum as well as to confirm trends, and define areas of support and resistance. Essentially, Moving Averages smooth out the “noise” when trying to interpret charts. Noise is made up of fluctuations of both price and volume. Because a Moving Average is a lagging indicator and reacts to events that have already happened, it is not used as a predictive indicator but rather an interpretive one, used for confirmations and analysis. In fact, Moving Averages form the basis of several other well-known technical analysis tools such as Bollinger Bands and the MACD. There are a few different types of Moving Averages which all take the same basic premise and add a variation. Most notable are the Simple Moving Average (SMA), the Exponential Moving Average (EMA) and the Weighted Moving Average (WMA)

TYPES

Moving Averages visualize the average price of a financial instrument over a specified period of time. However, there are a few different types of moving averages. They typically differ in the way that different data points are weighted or given significance.

Simple Moving Average (SMA)

Simple Moving Average is an unweighted Moving Average. This means that each day in the data set has equal importance and is weighted equally. As each new day ends, the oldest data point is dropped and the newest one is added to the beginning.

CALCULATION

Weighted Moving Average (WMA)

Weighted Moving Average is similar to the SMA, except the WMA adds significance to more recent data points. Each point within the period is assigned a multiplier (largest multiplier for the newest data point and then descends in order) which changes the weight or significance of that particular data point. Then, just like the SMA, once a new data point is added to the beginning, the oldest data point is thrown out.

CALCULATION

Exponential Moving Average (EMA)

Exponential Moving Average is very similar to (and is a type of) WMA. The major difference with the EMA is that old data points never leave the average. To clarify, old data points retain a multiplier (albeit declining to almost nothing) even if they are outside of the selected data series length.

CALCULATION

Double Exponential Moving Average

CALCULATION

Triple Exponential Moving Average

CALCULATION

THE BASICS

Moving Averages takes a set of data (closing prices over a specified time period) and outputs their average price. Now, unlike an oscillator, Moving Averages are not restricted to a number within a band or a set range of numbers. The MA can move right along with price.

The timeframes or periods used can vary quite significantly depending on the type of technical analysis being done. One fact that most always be remembered however, is that Moving Averages have lag inherently built into them. What this means is actually pretty simple. The longer the timeframe being used, the more lag there will be. Likewise, the shorter the timeframe, the less lag there will be. Basically, Moving averages with shorter timeframes tend to stay close to prices and will move right after prices move. Longer timeframes have much more cumbersome data and their moves lag behind the market’s move much more significantly. As for what time frames should be used, it really is up to the trader’s discretion. Typically any period under 20 days would be considered short term, anything between 20 and 60 would be medium term and of course anything longer than 60 days would be viewed as long term.

Another option which boils down to the trader’s preference is which type of Moving Average to use. While all the different types of Moving Averages are rather similar, they do have some differences that the trader should be aware of. For example, the EMA has much less lag than the SMA (because it puts a greater importance on more recent prices) and therefore turns quicker than the SMA. However, since the SMA gives an equal weighting to all data points, no matter how recent, the SMA has a much closer relationship to areas of significance such as traditional Support and Resistance.

WHAT TO LOOK FOR

When examining some of these common uses for Moving Averages, keep in mind that that it is the trader’s discretion which Moving Average in particular they wish to use. In the following examples, there will be written instances of; Moving Averages (MA), Simple Moving Averages (SMA), Exponential Moving Averages (EMA) and Weighted Moving Averages (WMA). Unless otherwise specified, these indicators can be considered interchangeable in terms of the governing principles behind their basic uses.

Basic Trend Identification

Using a Moving Average to confirm a trend in price is really one of the most basic, yet effecting ways of using the indicator. Consider that by design, Moving Averages “report” on what has already happened and that they also take into consideration a whole range of past events when calculating their formula. This is what makes a Moving Average such a good technical analysis tool for trend confirmations.

The general rules of thumb are as follows:

A Long-Term Moving Average that is clearly on the upswing is confirmation of a Bullish Trend. A Long-Term Moving Average that is clearly on the downswing is confirmation of a Bearish Trend.

Because of the large amounts of data considered when calculating a Long-Term Moving Average, it takes a considerable amount of movement in the market to cause the MA to change its course. A Long-Term MA is not very susceptible to rapid price changes in regards to the overall trend.

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Support and Resistance

Another fairly basic use for Moving Averages is identifying areas of support and resistance. Generally speaking, Moving averages can provide support in an uptrend and also they can provide resistance in a downtrend. While this can work for shorter term periods (20 days or less), the support and resistance provided by Moving Averages, can become even more readily apparent in longer term situations.

Crossovers

Crossovers require the use of two Moving Averages of varying length on the same chart. The two Moving averages should be of two different term lengths. For example a 50 Day Simple Moving Average (medium-term) and a 200 Day Simple Moving Average (long-term) The signals or potential trading opportunities occur when the shorter term SMA crosses above or below the longer term SMA.

Bullish Crossover – Occurs when the shorter term SMA crosses above the longer term SMA. Also known as a “Golden Cross”.

Bearish Crossover – Occurs when the shorter term SMA crosses below the longer term SMA. Also known as a “Dead Cross”.

  • It is imperative however, that the trader realizes the inherent shortcomings in these signals. This is a system that is created by combining not just one but two lagging indicators. Both of these indicators react only to what has already happened and are not designed to make “predictions”. A system like this one definitely works best in a very strong trend. While in a strong trend, this system or a similar one can actually be quite valuable.

Price Crossovers

If you take the two Moving Averages setup that was discussed in the previous section and add in the third element of price, there is another type of setup called a Price Crossover. With a Price Crossover you start with two Moving Averages of different term lengths (just like with the previously mentioned Crossover). You basically use the longer term Moving Average to confirm long term trend. The signals then occur when Price crosses above or below the shorter term Moving Average going in the same direction of the main, longer term trend. Just like in the previous example, let’s use a 50 Day Simple Moving Average and a 200 Day Simple Moving Average.

Bullish Price Crossover – Price crosses above the 50 SMA while the 50 SMA is above the 200 SMA. The 200 SMA is confirming the trend. Price and short term SMA are generating signals in the same direction as the trend.

Bearish Price Crossover – Price crosses below the 50 SMA while the 50 SMA is below the 200 SMA. The 200 SMA is confirming the trend. Price and short term SMA are generating signals in the same direction as the trend.

SUMMARY

An experienced technical analyst will know that they should be careful when using Moving Averages (Just like with any indicator). There is no doubt about the fact that they are trend identifiers. That can be quite a valuable bit of information. However, it is important to always be aware that they are lagging or reactive indicators. Moving Averages will never be on the cutting edge when it comes to predicting market moves. What they can do though, is just like many other indicators that have withstood the test of time, provide an added level of confidence to a trading strategy or system. When used in conjunction with more active indicators, you can at least be sure that in regards to the long term trend, you are looking to trade in the correct direction.

HOW TO USE IN TRADINGVIEW

  1. Navigate to https://www.tradingview.com/
  2. On the landing page, enter a symbol and click “Launch Chart”
  3. Within the Toolbar along the top of the chart select “Indicators” and choose the one you would like to add to your chart.
  4. To make changes to your Indicator you will need to access the Formatting Window.
  5. You can access the Formatting Window by either clicking on the Blue “Format” button in the Chart Header next to the Indicator name, or by right clicking on the Indicator in the chart itself and selecting “Format”.

INPUTS

Length

The time period to be used in calculating the Moving Average. 9 days is the default.

Source

Determines what data from each bar will be used in calculations. Close is the default.

Offset

Changing this number will move the Moving Average either Forwards or Backwards relative to the current market. 0 is the default.

STYLE

Can toggle the visibility of the MA as well as the visibility of a price line showing the actual current value of the MA. Can also select the MA’s color, line thickness and line style.

PROPERTIES

Last Value on Price Scale

Toggles the visibility of Last Values for the Moving Average on the Price Scale.

Arguments in Header

Toggles the visibility of the indicator’s name and settings in the upper left hand corner of the chart.

Scaling

Scales the indicator to either the Right or to the Left.

How to Trade With Exponential Moving Average Strategy

The exponential moving average is the oldest form of technical analysis. It is one of the most popular trading indicators used by thousands of traders. In this step-by-step guide, you’ll learn a simple exponential moving average strategy. Use what you learn to turn your trading around and become a successful, long-term trader! A moving average can be a very effective indicator. Many traders use exponential moving averages, an effective type of moving average indicator, to trade in a variety of markets.

An exponential moving average strategy, or EMA strategy, is used to identify the predominant trend in the market. It can also provide the support and resistance level to execute your trade.

Our team at Trading Strategy Guides has already covered the topic, trend following systems. You can review the trend here, MACD Trend Following Strategy – Simple to Learn Trading Strategy. You can also learn the basics of support and resistance here, Support and Resistance Zones – Road to Successful Trading.

Make sure you go through the recommended articles if you want to better understand how the market works. Building a foundation of understanding will help you dramatically improve your outcomes as a trader.

The Exponential Moving Average EMA Strategy is a universal trading strategy that works in all markets. This includes stocks, indices, Forex, currencies, and the crypto-currencies market, like the virtual currency Bitcoin. If the exponential moving average strategy works on any type of market, they work for any time frame. In simple terms, you can trade with it on your preferred chart. Also, read the hidden secrets of moving average.

Let’s first examine what a moving average is and the exponential moving average formula. After, we will dive into some of the key rules of the exponential moving average strategy,

Exponential Moving Average Formula and Exponential Moving Average Explained

The exponential moving average is a line on the price chart that uses a mathematical formula to smooth out the price action. It shows the average price over a certain period of time. The EMA formula puts more weight on the recent price. This means it’s more reliable because it reacts faster to the latest changes in price data.

An exponential moving average tries to reduce confusion and noise of everyday price action. Second, the moving average smooths the price and reveals the trend. It even sometimes reveals patterns that you can’t see. The average is also more reliable and accurate in forecasting future changes in the market price.

There are 3 steps for the exponential moving average formula and calculating the EMA. The formula uses a simple moving average SMA as the starting point for the EMA value. To calculate the SMA, take the sum of the number of time periods and divide by 20.

We need a multiplier that makes the moving average put more focus on the most recent price.

The moving average formula brings all these values together. They make up the moving average.

The exponential moving average formula below is for a 20-day EMA:

Initial SMA = 20-period sum / 20
Multiplier = (2 / (Time periods + 1) ) = (2 / (20 + 1) ) = 0.0952(9.52%)
EMA = x multiplier + EMA(previous day).

The general rule is that if the price trades above the moving average, we’re in an uptrend. As long as we stay above the exponential moving average, we should expect higher prices. Conversely, if we’re trading below, we’re in a downtrend. As long as we trade below the moving average, we should expect lower prices.

Before we go any further, we always recommend writing down the trading rules on a piece of paper. This exercise will step up your learning curve and you’ll become a better trader.

Let’s get started…

Exponential Moving Average Strategy

(Trading Rules – Sell Trade)

Our exponential moving average strategy is comprised of two elements. The first degree to capture a new trend is to use two exponential moving averages as an entry filter.

By using one moving average with a longer period and one with a shorter period, we automate the strategy. This removes any form of subjectivity from our trading process.

Step #1: Plot on your chart the 20 and 50 EMA

The first step is to properly set up our charts with the right moving averages. We can identify the EMA crossover at the later stage. The exponential moving average strategy uses the 20 and 50 periods EMA.

Most standard trading platforms come with default moving average indicators. It should not be a problem to locate the EMA either on your MT4 platform or Tradingview.

Now, we’re set to go a look more closely to the price structure. This brings us to the next step of the strategy.

Step #2: Wait for the EMA crossover and for the price to trade above the 20 and 50 EMA.

The second rule of this moving average strategy is the need for the price to trade above both 20 and 50 EMA. Secondly, we need to wait for the EMA crossover, which will add weight to the bullish case.

We refer to the EMA crossover for a buy trade when the 50-EMA crosses above the 50-EMA.

By looking at the EMA crossover, we create an automatic buy and sell signals.

Since the market is prone to false breakouts, we need more evidence than a simple EMA crossover. At this stage, we don’t know if the bullish sentiment is strong enough to push the price further after we buy to make a profit.

To avoid the false breakout, we added a new confluence to support our view. This brings us to the next step of the strategy.

Step #3: Wait for the zone between 20 and 50 EMA to be tested at least twice, then look for buying opportunities.

The conviction behind this moving average strategy relies on multiple factors. After the EMA crossover happened, we need to exercise more patience. We will wait for two successive and successful retests of the zone between the 20 and 50 EMA.

The two successful retests of the zone between 20 and 50 EMA give the market enough time to develop a trend.

Never forget that no price is too high to buy in trading. And no price is too low to sell.

Note* When we refer to the “zone between 20 and 50EMA,” we actually don’t mean that the price needs to trade in the space between the two moving averages.

We just wanted to cover the whole price spectrum between the two EMAs. This is because the price will only briefly touch the shorter moving average (20-EMA). But this is still a successful retest.

Now, we still need to define where exactly we are going to buy. This brings us to the next step of the strategy.

Step #4: Buy at the market when we retest the zone between 20 and 50 EMA for the third time.

If the price successfully retests the zone between 20 and 50 EMA for the third time, we go ahead and buy at the market price. We now have enough evidence that the bullish momentum is strong to continue pushing this market higher.

Now, we still need to define where to place our protective stop loss and where to take profits. This brings us to the next step of the strategy.

Step #5: Place the protective Stop Los 20 pips below the 50 EMA

After the EMA crossover happened, and after we had two successive retests, we know the trend is up. As long as we trade above both exponential moving averages the trend remains intact.

In this regard, we place our protective stop loss 20 pips below the 50 EMA. We added a buffer of 20 pips because we understand we’re not living in a perfect world. The market is prone to do false breakouts.

The last part of our EMA strategy is the exit strategy. It is based again on the exponential moving average.

Step #6: Take Profit once we break and close below the 50-EMA

In this particular case, we don’t use the same exit technique as our entry technique, which was based on the EMA crossover.

If we waited for the EMA crossover to happen on the other side, we would have given back some of the potential profits. We need to consider the fact that the exponential moving averages are a lagging indicator.

The exponential moving average formula used to plot our EMAs allow us to still take profits right at the time the market is about to reverse.

Note** The above was an example of a BUY trade. Use the same rules – but in reverse – for a SELL trade. However, because the market goes down much faster, we sell on the 1st retest of the zone between 20 and 50. After the EMA crossover happened.

In the figure below, you can see an actual SELL trade example, using our strategy.

Summary

The exponential moving average strategy is a classic example of how to construct a simple EMA crossover system. With this exponential moving average system, we’re not trying to predict the market. We’re trying to react to the current market condition, which is a much better way to trade.

The advantage of our trading strategy stands in the exponential moving average formula. It plots a much smoother EMA that gives better entries and exits.

We understand there are different trading styles. If following term trends are not for you, try reading our Best Short Term Trading Strategy – Profitable Short Term Trading Tips. It reveals a short-term trading trick used by institutional traders.

Thank you for reading!

Please leave a comment below if you have any questions about the Moving Average Strategy!

Also, please give this strategy a 5 star if you enjoyed it!

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Learn The 5 and 10 Simple Moving Average Trading Strategy

Just about any simple moving average trading strategy needs a good trending market to be an effective trading strategy.

Once a trading chart starts showing consolidating price action, the moving averages become virtually useless although moving averages converging can help you objectively identify a market in chop.

There are trading strategies that take advantage of consolidations and those are either trading the range or using a breakout trading strategy. Understanding various methods of technical analysis to identify favorable range trading conditions are something traders should learn so they are not caught up trading consolidations when they think they are trading a trending market.

This moving average trading strategy is going to focus on trading pullbacks in a trending market and we will combine it with measures of:

  • The strength of the trend we are trading
  • If price is either oversold or overbought

You can use this trading strategy in Forex or other markets and as either a day trading approach, swing trading, and even position trading.

Difference Between Simple Moving Averages And Others

In reality, the differences between various forms of moving averages will not improve a trading strategy to any measurable result. We are using simple moving averages as a matter of course and by using the SMA, we will just be using the last X days average of price.

Exponential moving averages takes into account more data than the period used although the impact of historical price data decays over time.

Let’s keep things simple and stick to the SMA

Time frames – You can use lower time frames such as 5 minute charts higher time frames (4 hours – daily chart) are my favorite time frames for trading Forex

Currency – Any currency pair but stick to the currency pairs that move such as EURJPY, EURUSD, GBPUSD

Indicators – 5 and 10 simple moving averages (SMA), stochastic oscillator 14,3,3, and RSI setting of 9

We are using stochastic at 80/20 for oversold and overbought markets

RSI (relative strength index) – Measure of trend strength

Trend Determination Using Moving Averages

The 5 SMA is a fast moving average and we will combine it with the slightly slower 10 period SMA. When the 5 crosses the 10 to the upside, we will assume we are in an uptrend

When the 5 crosses to the downside over the 10 simple moving average, assume we are in a down trend.

This is a nice objective way to measure the trend although using any technical indicator, you will have a lag between the price action and the indicator showing the trend change.

Trading Strategy Rules

As with any trading strategy, you must follow the rules or you will not find much success. Even better, make sure you put together a trading plan that dictates every move you will make in the markets.

Let’s take a look at how a sell signal will show up on the chart and how you will trade the signal.

  1. The first thing we look for is a crossing of the 5 period simple moving average over the 10 SMA to the downside
  2. Look to see that the RSI is either crossing or has crossed the 50 level which indicates the momentum is to the downside
  3. Has the stochastic left the overbought area or in the process and trending to the downside?
  4. IF all the above are yes, place a sell stop order below the low of the candlestick that turned the moving averages

That is how you will determine a short trade and before you trade the sell signal, ensure you know where you will get out if wrong. We will cover stop loss positions later. The candlestick shown as the setup candlestick may NOT be the one that actually turned the moving averages.

Remember, moving averages are lagging indicators and it may have been the next one that showed the clear turn.

A buy signal is the opposite of the sell signal.

  1. Noted the moving averages have crossed over and the 5 period SMA is above the 10 period
  2. Relative strength index has already crossed over the 50 level indicating an uptrend
  3. Stochastic has crossed from oversold and is heading upwards
  4. A buy stop order is placed above the high of the candlestick that turned the moving averages

The only difference between a sell signal and a buy signal is the direction the indicators must show.

Stop Loss For Simple Moving Average Trading Strategy

I am not a believer in a set number of pips for a stop loss. You have various techniques you can use for a protective stop loss:

  1. Use the high or low of the setup candlestick and place your stop below (above) that candlestick. This is dynamic as every candlestick will have a different range in price.
  2. Use an average true range to place your stop loss. I’ve covered this and other stop loss placement methods in another blog post.

Whichever method you use, the key is to be consistent with all your trading setups. This is why you need a trading plan to ensure you stay on the right track.

Take Profit Strategies

Like stop loss placement, taking your profits is not one size fits all.

You can read this article, Let Profits Run, to see how to take full advantage of what the market is offering instead of taking only a few pips from the move

Some traders will target various support or resistance levels to exit their trade. Here is a support and resistance indicator for Metatrader you can download.

Fibonacci Price Targets

I must say that one of my favorite ways of finding profit targets for any strategy including a moving average trading strategy is Fibonacci extentions

As you can see in this chart, price found all 3 targets including finding the top at the 200% level measured from the previous swing.

I may do an article on how to use Fibonacci in terms of taking profits. I find it incredibly useful as the various levels also act as areas to scale out partial profits.

Summary

As you can see, this is a simple moving average trading strategy that takes into account trend and momentum for your trading signals.

Ensure you use proper stop losses, risk control, and you find ways to take what the market is offering without kneejerking out of your trades.

Don’t forget to share this article with your friends by clicking those buttons below. Thanks

Simple Moving Average Binary Options Trading Strategy

Profitable binary options trading strategy can be built even on the most simple technical indicators such as Moving Averages. Using a combination of different types and settings for this widely used technical indicator as well as several general rules of Moving Averages’ behaviour could turn into a whole trading system which proved its profitability.

What is a Simple Moving Average Trading Strategy?

The best type of the Moving Average depends on the timeframe you choose to trade. The Simple Moving Average (SMA) works in the best way for short-term timeframes intraday (M1, M15, M30, H1, H4). Longer timeframes with a wider scale need to have an additional filter and the best type would be the Exponential Moving Average (D1, W, MN). This binary options trading strategy uses two indicators with different settings – periods 21 and 70. This combination allows a trader to monitor trend reversals as well as oversold and overbought levels when the price is going too far from its average value based on previous periods.

If you like this strategy, you might also be interested in this Rectangle Pattern

Simple Moving Average Trading Rules

After the price crossed one of the lines, we should wait a bit and see what would be the close rate of the current candle. This pause is needed for understanding if the reversal occurred. So, if the prices have reversed on the chart before reaching the second moving average (with the higher period of 70), then we enter the market on crossing (slightly earlier) of the first Moving Average with the period of 21.

The stop-loss order should be placed slightly behind the recent bottom or top (depending on the direction of your position).

How to use Simple Moving Average Strategy?

This simple binary options trading strategy has certain disadvantages though. One of them is a large number of fake signals which could occur when the trend is reaching its final stage (going to reverse). But at the same time, there is a huge advantage of this strategy which is the fact that you will always follow the trend when trading on this system. Sometimes beginners wish to open too many positions against the main trend, but this is definitely not the winning approach in binary options.

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