Hello, friends! In a previous article, I talked about the MA (Moving Average indicator). Today we will continue the topic of this indicator by considering several trading methods using it. Make sure you have created an account with one of the Top Forex Brokers
Dynamic levels based on moving averages
Moving averages are very well used as dynamic levels. Let’s look at this with an example:
I noted with rectangles where the price came into contact with the moving averages and rebounded from them. I also circled the current price with a green circle. If based on your TS signals, you initiated a purchase transaction in this location, it would be fair to set profit at a dynamic amount, taking into consideration their prior experience.
What is causing this?
Most traders, like you, spot these levels (particularly during busy times), place pending orders, and lock in gains. In short, there is a high concentration of orders. As a consequence, these levels become substantial, and the price reflects them.
Another common trading strategy is the junction of a rapid and slow-moving average.
For clarity, draw a moving average with a period of 8 (red) on the EURUSD hourly chart; this will be quick for us, and a period of 21 (blue) will be sluggish for us.
If it’s evident that a period of 8 responds quicker to price, see the article “Moving Average Indicator.”
So, what do we observe?
In this time period, there were three intersections between the fast-moving average and the slow one. I marked these places with green rectangles.
How to enter the market?
Buy- if the fast-moving average crosses the slow one from the bottom up (marked 1 and 3 in the screenshot).
Sell- when the fast-moving average crosses the slow one from top to bottom (marked with the number 2).
There are many options for entering the market when the averages cross. Here are some examples:
The options for entering the market are marked with ticks. Under the number 1, entry immediately after the closing of the candle on which the intersection occurred, entry 2 – placing a pending order closer to the slow-moving one (often the price after the crossing returns to the moving one with subsequent bars).
And the third entry option, also a pending order, but placed behind the moving average. As you can see, any of the options would have been profitable.
Now, about the stop loss, it’s more complicated here, it should always be lower (as in this example) and higher when selling a slow-moving average, this will prevent the trade from being knocked out due to price noise.
And at what distance, it all depends on the dynamics of price volatility, the time-frame of the currency pair, the moving period, on the size of the candle on which the intersection occurred. But not less than 10-15 points from the point of intersection. In this example, the stop loss is approximately at this distance.
According to the same criteria, a take profit is set, but not less than a single stop loss size. In general, take this as a rule, any transaction must have a take profit not less than the size of the stop loss, otherwise, the trading system will be risky (unprofitable) and profitable transactions will not cover unprofitable ones.
You must develop the entry and exit method yourself, empirically on a demo account.
In my opinion, the crossing of moving averages cannot be used as a signal for action, this signal should serve as a confirmation of some other. Why?
Firstly: this is a weak signal in itself, and as soon as you see the intersection of moving averages on the chart, you should not immediately rush to open orders. You must analyze it.
Second: it is important to consider price noise, and when using a moving average with a short period, it frequently produces false signals, indicating a crossover when the short-term trend has already ended. With a longer period, it is less agile, although much more reliable.
On the high time-frames of the moving and long time-frames of currency pairs, a crossover of the averages should be taken as a signal for an incipient long-term trend, as shown in the EURUSD daily chart below.
Do not forget that the moving average is an indicator. It is characterized by its disadvantages, namely, the lagging of signals from the price. Join our Telegram channel for market updates
