Using Moving Averages In Your Trading

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The Benefits of Using Moving Averages in Forex Trading

The Benefits of Using Moving Averages – Spotting Trend Changes and Trading Signals.

Price movements of all actively traded securities are a measure of volatility and therefore take on the appearance of being very erratic.

To the untrained eye, the price chart of any given security resembles an indecipherable mess of squiggly lines with little meaning.

Even to an experienced chart analyst price fluctuations can be very misleading.

What is called for in order to eliminate these wild undulations and to enable the analyst to identify the underlying trend is a smoothing device, something to reduce the undulations and isolate the overall movement of prices.

This is the function best served by moving averages.

All averages of prices tend to fluctuate less actively than the prices from which they are derived:

The greater the number of days from which an average is composed, the more gentle and gradual are the fluctuations relative to the price action from which it is derived.

In his book, Commodity Futures Trading With Moving Averages, J.R. Maxwell provides a succinct account of the usefulness of moving averages when incorporated in a trading program:

The use of an average eliminates or reduces the distraction caused by the often sudden and relatively far-reaching daily price fluctuations, enabling the user to observe a smoother depiction of the trend changes as they occur.

This is one of the two principal reasons for the widespread use of various types of averages as trading tools.

The second principal reason is that these figures, when plotted as lines on charts, with the closing prices or other lines representing price action, will cross above and below one another as market trends change.

Two averages encompassing different numbers of price units (days) will cross over and under each other in the same fashion.

Such crossings, either by themselves or in combination with other signals, such as changes in statistical data concerning supply and demand, serve as trading signals for a large proportion of the people who speculate in the futures markets.

The Most Recommended Moving Averages Forex Trading Systems

These crossings are definite, easily observed signals in a fast-moving and frequently very confusing swirl of activity.

Clear-cut signs, such as these are, to buy and to sell, can be comforting to have under such conditions, especially when they appear to be well accepted by so many traders, and their use seems to be based upon solid logic.

The different forms of analysis involving moving averages are many and varied.

Many traders place heavy emphasis on the trading signals provided when two moving averages of the underlying security’s Priceline cross.

Others rely on a system involving a moving average or series of moving averages calculated from a moving average itself in relation to the underlying security’s price to generate trading signals.

Others still prefer to rely simply on a single moving average, which is plotted with the Priceline.

The results they obtain trading with these signals vary depending on the time frame of the averages used along with a variety of other factors.

Concludes Maxwell : “ A moving average is like any tool . It is essential to know its capabilities and its limitations before its potential value can be determined. Then, if it has any merit, the skill may be required to obtain the maximum benefit from its use.”

For a more detailed discussion of moving average crossovers, please see The Essence of Moving Averages: What Every Successful Forex Trader Should Know.

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Trading systems based on fast moving averages are quite easy to follow.

Let’s take a look at this simple system.

  • Currency pairs: ANY
  • Timeframe chart: 1 hour or 15-minute chart
  • Indicators: 10 EMA, 25 EMA, 50 EMA

Entry Rules :

When 10 EMA goes through 25 EMA and continues through 50 EMA, BUY/SELL in the direction of 10 EMA once it clearly makes it through 50 EMA.

(Just wait for the current price bar to close on the opposite side of 50 EMA. This waiting helps to avoid false signals).

Exit Rules :

  • option 1: exit when 10 EMA crosses 25 EMA again.
  • option 2: exit when 10 EMA returns and touches 50 EMA (again it is suggested to wait until the current price bar after so-called “touch” has been closed on the opposite side of 50 EMA).

Advantages :

it is easy to use, and it gives very good results when the market is trending, at big price break-outs and big price moves.

Disadvantages :

the Fast moving average indicator is a follow-up indicator or it is also called a lagging indicator, which means it does not predict future market directions, but rather reflects current situation on the market.

This characteristic makes it vulnerable: firstly, because it can change its signals anytime, secondly – because need to watch it all the time; and finally, when market trades sideways (no trend) with very little fluctuation in price it can give many false signals, so it is not suggested to use it during such periods.

Beginners Guide to Trading Moving Averages for the Crypto Market

Using candlestick formations in order to determine price movement from one direction or another is great for what it does within a more confined timeframe. The problem is, the level of detail that you get from candlestick formations is so granular, that it may be hard to determine the overall trend across the daily highs and lows of a particular cryptocurrency.

This is where moving averages come into play and why they’re one of my all-time favorite trading signals for both ease-of-use and reliability.

Moving averages will really help you break down the momentum of a particular crypto coin. These averages are represented by a simple line which gives an indication as to where a coins price was and is most likely going to be, in an easy-to-see format.

Let’s start off with one of the most basic moving averages…

Simple Moving Average

This moving average, as the name implies, is a simple line that represents the closing price of a cryptocurrency, which is averaged out over a period of time.

In layman’s terms, you simply write down the closing prices for say the last 30 days, add them all up, and then divide that total by 30. This will give you the average of that particular number set.

The most common simple moving averages that you’ll read about are the 50, 100, and 200 day moving averages. Each of these three moving averages will show the momentum during their respective time period (50 days, 100 days, or 200 days).

The only weakness behind simple moving averages is its inherent simplicity, where the data points are assigned the same weight, which affects the outcome of each one equally. This means if you have a price that is severely out of range, compared to the other price points, this can skew the simple moving average line, which in turn can give you inaccurate results.

Let’s look at an example for context…

Say the first four days of price action was at $3, $4, $4, $5, and then a whopping $25. The simple moving average line would then be centered on the average of $8. As you can clearly see, this major movement in price tends to greatly disrupt the averages.

Don’t worry; I cover a strategy further down this guide utilizing the exponential moving averages alongside simple moving averages, that will help facilitate the correction of this issue.

For now, let’s discuss the 3 most common types of simple moving averages.

50 Day Moving Average

A 50 day moving average measures the short-term market confidence. This moving average is consistently used by swing traders, due to its accurate representation of the market during a 24 hour period.

When price action is above the 50 day moving average, this indicates that you’re in a short-term bull market. The opposite rings true for price action below the 50 day moving average. This would clearly indicate that you’re in a short-term bear market.

Also worth noting, when candlestick formations are moving between bullish and bearish sides of the 50 day moving average, this indicates a “ranging period” where the market is undecided where it wants to go. Trading during these ranging periods is much riskier than trading in a substantiated trend (bear or bull trend).

As you can imagine, trading alongside a trend is much more predictable than trading sideways where the market sentiment has yet to be determined.

What’s interesting about the 50 day moving average is that it’s sensitive enough to show large institutional buys or selloffs. These price movements are recorded more accurately on this shorter-term moving average.

100 Day Moving Average

This moving average is considered a medium-term momentum indicator. These are characterized by sharp changes or reversals in the market and tend to include large economic or political movements. You can expect the 100 day moving average to move opposite of the primary trend that follows the 50 day. Much like the 50 day moving average, prices above the 100 day moving average are more long term bullish and prices below this line are bearish.

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200 Day Moving Average

As you might expect, the 200 day moving average is a crucial gauge for longer-term trends. This is what you would call the “big picture” or “birdseye view” on how a particular market is doing.

This moving average is not going to tell you where to place a buy or sell order on a day or swing trading basis, however it will let you know whether you need a hold on to a cryptocurrency for a while or if you should start thinking about exiting the market.

I typically use the 50/200 SMAs cross to get an overall feel for where the market is currently and the direction it will be headed when swing trading. I cover more on this strategy below under “The CCJ Moving Average Strategy”.

The Golden Cross

The Golden Cross is defined when the line of a short-term moving average crosses a longer-term line. This cross indicates that a bullish or bearish breakout is imminent. You can look at the cross as a warning of what’s to come (think red alert).

So for example, if you have a 50 day moving average cross over a 200 day moving average, this indicates that bearish sentiment is soon approaching. The same goes for bullish sentiment. If the 50 day moving average crosses under a 200 day moving average, this indicates that bullish sentiment will soon take over.

The reason I use the 200 MA as opposed to the 100 is due to the fact that there is a much larger separation between these 2 moving averages. The 50 and 100 MAs tend to overlap one another.

It’s important to note that bearish or bullish sentiment is soon approaching once these two lines move closer together. You don’t always have to wait for a cross, but it is preferred for confirmation.

Next let’s talk about one of the most utilized moving averages for both day and swing traders alike.

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This article will discuss a specific type of moving average known as the ‘Exponential Moving Average’ (EMA). We’ll also look at an easy-to-use trading tool called the ‘Exponential Moving Average Indicator’ that uses this method to assess trends within the Forex market.

So What is An Exponential Moving Average?

An essential type of tool for assessing trends is the moving average. We use moving averages to smooth out variations in data, to better discern the underlying trend. They do this by looking back at a recent number of data points, and then calculating some form of average of the values. There is more than one way to calculate an average though, and there are several types of moving average.

The most straightforward method is the Simple Moving Average (SMA), which considers all price values equally, and takes the mean as the average. Other common types of moving average assign a weighting to different price values, favouring recent prices more heavily than older prices. This is the way in which the exponential moving average model works, with the amount of weighting assigned to a price decreasing exponentially as we go backwards in time.

What is a Exponential Moving Average?

It is fairly difficult to provide a satisfactory exponential moving average definition without getting into the specifics of the calculations involved. A broad EMA definition is: a smoothing technique arrived at by adding a portion of the current price, to a portion of the value of the previous moving average. To properly get a handle on what is going on though, we need to get our hands dirty and look at the maths. So let’s go ahead and roll up our sleeves.

How to Calculate an Exponential Moving Average

We calculate an EMA at time – t – using the exponential moving average formula as follows:

  • EMAt = α x current price + (1- α) x EMAt-1

Where ‘α’ is a smoothing constant with a value between 0 and 1, EMAt-1 is the EMA for the previous period. You can see from this that calculating the EMA for a given point in time requires us to have performed prior calculations, to know the EMAs for previous periods. For a daily EMA, we derive the current value from the prior day’s EMA, which in turn we derive from the day before that, and so on.

In other words, there are some other steps involved. The first of these is to obtain a starting EMA value for the first period in our window. We also need to determine our smoothing constant. Probably the best way to illustrate the process of how to find an exponential moving average is to look at a specific example.

Exponential Moving Average Example

To keep the example simple, we are only going to use a few data values. Let’s look at how to calculate an 8-day EMA from some sample values. The table below shows the values involved in calculating the 8-day EMA.

Day

Sample Price

8-day SMA

α

8-day EMA

We need a moving average value for Day 1 to begin. For this, we’ll use a simple moving average as our initial value. This is the sum of the previous ‘n’ values, divided by n. On the ninth day, we have our starting value, which is the SMA of the previous 8 day’s prices. Though the SMA is only required for the purpose of providing us with our starting value for our EMA calculations, we have included a column of SMA values.

That way, you can see the comparative values of the exponential average vs the simple moving average. We also need to use a smoothing factor. This is governed by the number of periods in the EMA. Specifically, the equation for the smoothing value is as follows:

Another way of describing what the calculation method is doing is to say that the EMA is by looking back at past values, and then discounting their weights by a factor of (1-α) per period. We can see from this that another, fuller name for the method is an ‘exponential-weighted moving average model’. Exponential moving average forecasting is a widely-used method of time series modelling in business because it works well under a large range of conditions, while also being fairly simple to calculate.

It’s common for management to make decisions based on projections of future business metrics. Such projections are often derived from EMA data models. A moving average forecasting example might include looking at previous sales data, exponentially-smoothed in order to make projections for future sales. In a similar way, professional traders use EMAs to smooth previous price data in the hopes of tapping into an ongoing trend.

In our calculations above, we only went back to include a small number of previous data points. An EMA will be more accurate the further you go back; however, and ideally, you want to be including much larger amounts of previous EMA values. Any platform worth its salt will run the exponential moving average algorithm for you, so that you don’t need to worry about the complexity of the calculations. Let’s now look at how to use the MetaTrader 4 EMA indicator.

EMA Indicator in MetaTrader 4

The Exponential Moving Average Indicator comes with the MT4 download, as one of the core tools bundled with the platform. As you can see from the image below, the Moving Average indicator is listed as one of the Trend indicators within MT4:

Source: MetaTrader 4 – How to select the EMA in MT4

The MA method field defines the type of moving average that you’ll add to the chart. In the image above, we’ve naturally selected Exponential. Apart from cosmetic choices, the two EMA settings are ‘Period’ and ‘Shift’. Of these, the more important setting to choose is the exponential moving average period. The larger the period, the smoother the chart.

The smaller the period, the more responsive the EMA line will be in responding to the price. Some typical EMA settings are 10 and 25 periods for faster, more responsive curves; 100 and 200 periods for very smooth, slow-moving curves; and 50 periods for an intermediate curve.

Obviously, just how long those trends are will be dictated by the time frame of your chart. The shift setting works by offsetting the EMA curve along the x-axis by the number you specify. The default value of 0 for the shift setting is a good place to start. The image below shows a 16-period Forex EMA indicator added to an hourly EUR/USD chart:

Depicted: MetaTrader 4 – price data from Admiral Markets – hourly EUR/USD chart – Disclaimer: Charts for financial instruments in this article are for illustrative purposes and does not constitute trading advice or a solicitation to buy or sell any financial instrument provided by Admiral Markets (CFDs, ETFs, Shares). Past performance is not necessarily an indication of future performance.

The EMA chart indicator appears as a dotted green line with the settings we have chosen. Can you see how the EMA indicator line is much smoother than the movements of the underlying price? It still traces the general movement of the market, but it effectively filters out price noise, showing us a clearer indication of the overriding trend.

It is the slope of the MT4 EMA indicator that guides us to the trend. Notice how we get a sustained uptrend after the price breaks above the EMA line? This is one of the key aspects of how to trade with the EMA Indicator – price crossing above the EMA can provide a trading signal.

Exponential Moving Average Trading Strategy

An even more effective way of reading an exponential moving average cross is by using a double exponential moving average combination, one short-term and one-long term. This exponential moving average crossover strategy creates a trading signal when the shorter EMA crosses the longer one.

For example, a long-term trend trader might use a 25-day EMA as the shorter average and a 100-day EMA as the long-term trend line. With this exponential moving average strategy, the trader would then buy when the 25-day EMA crosses above the 100-day EMA, and sell when the 25-day EMA crosses below the 100-day EMA.

Using an EMA With Other Indicators

Moving averages have more than one use. In fact, they are often paired up with other indicators in order to make trading systems. For example, a typical use can be as a trend filter for a breakout strategy. Consider a trend-following Bollinger Bands/exponential moving average breakout system – here, we would use the Bollinger Bands to provide our trading signals.

The Bollinger Bands plot a volatility envelope above and below the price on a chart. If the price breaks beyond the envelope, we would take it as a signal to trade in that direction – but only if our trend filter, which is a short-term EMA and a long-term EMA line, agreed with the direction. So for a breakout above the upper Bollinger Band, it would be a buy signal, and we would need the short-term EMA to be above the long-term EMA for us to follow the signal.

Conversely, for a breakout below the lower Bollinger Band, we would sell, but only if the short-term EMA was below the long-term EMA. There’s a lot of combinations that have been and can still be dreamt up – and the wider the selection of tools at your disposal, the greater the scope for invention. MetaTrader Supreme Edition is an plugin for MetaTrader 4 and MetaTrader 5 that offers a huge expansion in the range of indicators and trading tools at your disposal. It’s free to download, so why not try this cutting-edge upgrade?

Conclusion

We have seen how we can smooth price data using an exponential moving average. Not only does this indicator help confirm the trend, but it can also help to inform you when to trade, as we saw with the MT4 EMA crossover indicator strategy. As with all moving averages, you need to be aware that an EMA responds with a lag.

Because it utilises past data, the price will always be on the move before the EMA starts to move. Generally speaking, an EMA will respond quicker to newer data compared with an SMA, as it assigns more weight to more recent prices.The exact curve characteristics are governed by the period you choose, of course.

A great way to determine what the best exponential moving average settings for your own trading style are is to go ahead and test them in a demo trading account. Because demo trading is risk-free, it allows you the freedom to tinker with the settings until you can find the perfect mix for you. We hope that you enjoyed this discussion of trading with exponential moving averages.

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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.

Moving Average Forex Strategy

Moving Average Indicator

Determining the Forex market trend is very important for successful trading. Indicators help traders determine the price direction of the market.

One of the most commonly used indicators available on Metatrader 4 and Metatrader 5 is the Moving Average.
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Moving Average – Definition

This indicator helps determine the trend direction, its possible reversals, as well as a flat market (when the price is neither rising nor declining).

How is that achieved?

Moving Average (MA) is a trend indicator, which is essentially a curve calculated based on the price changes.

As such, the moving average assists traders by confirming the trend. On the chart, this curve mirrors the price direction, but its movements are smoother.

In the examples below, you will find helpful information abouthow this indicator determines the trend:

Determining uptrend with МА

  1. Uptrend
  2. Maximums are constantly renewed
  3. SMA (red) reflects asset growth

The first example demonstrates how the growing asset formed an uptrend and the Moving Average confirms it. A downtrend is shown in the next chart.

Determining downtrend with МА

  1. Downtrend
  2. Minimums are renewed
  3. SMA (red) reflects asset decline

Moving Average: Indicator Characteristics

At each point, the MA value is an average price indicator over a certain period of time.

Sometimes it is an arithmetic mean, other times more complex formulas are employed.

A period is the main indicator’s parameter;t determines the number of time series to be factored in when setting the moving average parameter.

There four basic MA types:

  1. Simple MA – Its values are simple arithmetic means of the price changes.
  2. Exponential MA – Here more weight is given to the latest data. The weight is calculated in arithmetic series.
  3. Linearly weighted MA -More weight is given to the latest data, however, the weight is calculated exponentially.
  4. Smoothed MA – More weight is given to the latest data, it takes into account the price values beyond the time period (their influence is not significant).

It is quite easy to add this indicator in the MetaTrader 4 chart. You can do that by selecting “Indicators” – ”Trend” – ”Moving Average” in the “Insert” tab of the upper menu or just by clicking on the relevant icon on the toolbar.

To set the indicator, right-click on the indicator and choose Parameters.

You will see a window, where you can set the following parameters:

  1. Period
  2. Shift
  3. МА method ( МА type, e.g. Simple or Smoothed)
  4. Apply to (calculate based on the opening/closing price, etc.)
  5. МА style (color, thickness)

You can also choose the timeframes in the Parameters window. For example, if your trading strategy envisages only 14 МА on the H4 and H1 charts, you need to specify it in the settings:

The majority of strategies use Simple Moving Average. As a rule, it is set to default unless otherwise required by the trading system.

Below we will have a closer look at the MA types and strategies.
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Moving Average Types

Simple moving average (SMA)

Simple Moving Average is represented as a line and is calculated based on the arithmetic means of the previous price values.

The bigger the period (the number of values taken into account), the smoother and more remote from the price chart, the moving average will be.

For example, if daily closing prices on a 5-day chart were at 1.2, 1.3, 1.2, 1.5, and 1.6, the SMA value at the next point will be 1.36. To obtain the next 5-day SMA value, we need to drop 1.2 and add the closing price that goes after 1.6 to the formula.

To add SMA on the chart, you need to choose the Moving Average from the general list of the platform’s indicators.

After that, you will see a window, where you will need to select Simple in the MA Method. Other settings depend on the trading strategy conditions.

SMA is the most popular MA type, and it lies at the core of many strategies.

Despite the fact that SMA is rarely used without additional indicators, there are some strategies that employ only SMA.

One of the most reliable SMA strategies is the “Sweet Chariot” strategy.

The Sweet Chariot strategy is designed for medium- and short-term trading, the optimum timeframes are D1 or W1.

Trading with 1-hour or 4-hour charts is also possible, however, the bigger the time frames, the more precise the trend will be.

And trading with the trend is the key to success with this strategy.

The signal indicator is 40-period SMA.

The strategy has two rules:

  • If the price crosses MA upwards and the candle is closed above the moving average, you need to buy when the next bar opens.
  • If the price crosses MA downwards and the candle is closed below the line, you need to sell.

Stop loss is set below the minimum (or above the maximum) of the low candle.

The profit can be locked using both take profit (for example, its distance can be three times (or more) larger than the stop loss value) or trailing stop.

The Sweet Chariot is quite an old strategy. Despite the fact that the traditional version does not use any oscillators, some traders can add other tools like ADX.

The Chariot works really well with the trend. However, it is only logical to use a filter to minimize the risks of entering the flat market.

Exponential Moving Average

Exponential МА is different from the simple one in that it gives more weight to the latest data when calculating the MA value at each point.

The EMA formula is rather complex, but, essentially, it means that a 10-period EMA will give the most weight to the previous price values and the closing price of the 10th candle (in reverse order) will have almost no effect.

This MA has been developed to facilitate a smoother transition between the time frames.

Reduction in the weight of price values as they move away resolves the SMA’s problems, where dropping the last price can affect the indicator more than adding the new one.

As a result, a line with the same period is smoother and closer to the chart, and its signals are less dependent on the large but outdated values.

EMA is set in the same way as SMA. The only difference is that you will need to choose Exponential as the MA Method in the indicator window.

Many of the Forex trading strategies that use SMA can employ EMA as well.

When refining traditional strategies, professional traders can sometimes change not only the period but also MA type by substituting SMA with EMA.

After testing and revising, this modification can prove more profitable and effective than the traditional SMA system.

The EMA+ Awesome Oscillator strategy could be a good example.

It is a well-known combination of a trend indicator, which determines the trend direction, and the oscillator that helps in choosing the best moment to enter the market.

This strategy is suitable for any time frame, but we recommend it for short-term trading with M15-H1 charts.

A long position is open in the following cases:

  • The price crosses EMA upwards.
  • The AO histogram crosses the zero line upwards.

Conversely, a short position is open.

The system is quite simple and does not involve any strict requirements for exiting the market.

The position can remain open until the reverse signal is received or you can set stop loss and take profit parameters.

If you’ve chosen the latter option, the loss/profit ratio shall be no less than 1:3.

Linearly weighted moving average

This MA type, just like EMA, gives more weight to the latest price data. However, with WMA the weight is calculated in geometric and not arithmetic series.

For example, for a 5-period MA the weight of the last price value will be 5, the one before that will be 4 and so on until it reaches 1.

The WMA is set in the same way as the previous ones. The only difference is that you will need to choose Linear Weighted as the MA Method in the indicator window.

There are not that many trading strategies that use WMA.

Usually, these are advanced strategies that have been developed by experimenting with and modifying more simple systems.

For the sake of example, let us have a look at the strategy that employs WMA, RSI and MACD.

It is designed for medium-term trading with a day chart, EUR/USD would be the optimum asset.

Firstly, you need to add the following indicators to the chart:

  • Five WMAs with the periods of 5, 15, 30, 60, 90.
  • RSI oscillator, period is 5, levels are 40 and 60.
  • MACD with periods of 5 and 13 for slow and fast EMAs, correspondingly (SMA is default).

A short position is open in the following cases:

  • The fastest 5-period WMA crosses the 15-period MA and they are both below the remaining MA.
  • The RSI line is in overbought (above 60) and crosses this level downwards.
  • The MACD histogram rises above 0.005 and then crosses it in reverse.

Conversely, a long position is open.

This strategy was developed by traders from the West several years ago, and it was praised on the forums.

Nevertheless, some specialists think that three WMAs (30, 60 and 90 periods) are superfluous and could be removed without affecting the quality of the trading signals.

Traders are free to decide on how to exit the market, however, stop loss is mandatory according to all the risk management rules.

A protection order can be set both at the low candle’s minimum/maximum or the closest support/resistance level.

Smoothed Moving Average

This type of MA takes into account not only the price values within the set period but also some historical data.

Although the priority is given to the weight of the more recent data, the historical values also affect the final results.

If EMA and WMA move more smoothly and are closer to the price chart than the SMA with the same period, then smoothed moving average will be remote.

Smoothed moving average is set in the same way as all the previous ones: traders choose the period, shift and style and then select Smoothed as the MA Method.

Smoothed Moving Average is the least popular MA type.

It is rarely used in any trading strategies and mainly employed in complex automated trading systems or as part of custom indicators.

Trading with moving averages

Moving Average is a universal tool. It is suitable for any timeframes and assets.

There are plenty of different trading strategies and approaches that use moving averages. Below are the most basic ones.

Trading with one MA

This is the most basic and universal approach. Since only one indicator is needed for the analysis, the position should be open when the price crosses the MA:

  • If the price crosses MA upwards, a long position opens.
  • If the price crosses MA downwards, it’s best to sell.

One of the strategy’s shortcomings is that there are many false signals. One MA can help catch a major trend, but before that, you might have to open several losing positions.

That is why you have to set stop loss for each position and allow the profit to grow, thus compensating for the previous losses.

Trading with two moving averages

This approach is similar to the previous one, but here the chart has two MAs with different parameters. The signal will be the intersection of the two MAs:

  • If the fast MA crosses the slow one upwards, a long position is open.
  • Conversely, it’s best to sell.

As becomes clear from the example, the second MA allows to filter out many false signals.

Then again, there is another problem which is connected with lagging. It often happens that the two MAs intersect only when half of the trend is already behind.

Moving Average + MACD

MACD is an oscillator that uses the data on two MAs and their interactions. Together with MA, it acts as a filter.

The MA+MACD strategy algorithm is as follows:

  • It is recommended to go long when the price crosses MA upwards and the MACD bars cross the line upwards as well.
  • It is best to go short when the price crosses MA downwards, and the MACD bars move in the same direction.

If the signal of one of the indicators is lagging and they are not synchronised, it’s best not to open a position.

Conclusion

Moving Average is a universal indicator that is used for chart analysis in all financial markets.

The technical analysis specialists use moving averages to trade not only Forex trading pairs; they also use them with CFDs, commodities futures and even in bitcoin trading.

Basic MA trading strategies will help you gain experience and master your skills.

Apart from that, you will have to learn more about other indicators and try to use them to make your trading more effective.

However, the only way to get truly substantial profits is to develop your own strategy based on your trading experience.

The strategies described in this article are available on the AvaTrade’s trading platform.

You can test them without any risks as each new trader gets a free demo account that they can use for 21 days.

Trading in the financial markets is associated with high investment risks. To level them out, it is necessary to follow the money management rules and set the stop loss. Traders make all the decisions in the Forex market at their own risk.

We recommend you to visit our trading for beginners section for more articles on how to trade Forex and CFDs.

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