Moving averages (MA) are the oldest and simplest indicators in trading. In times when there were no computers the easiest way to visualize the price movement was to plot them on chart. Computers turned moving averages into a powerful tool for technical analysis that is used in many different trading systems.
There are many types of it but the most widely known ones are Simple Moving Average (SMA), Exponential (EMA) and Weighted (WMA). SMA is just an average of price over certain period of time. EMA and WMA tend to give more weight for the recent price therefore they are more sensitive for the quick price movements.
Trading signals based on MA
Moving averages filter out the small oscillations of the price movement giving out the main direction of the trend. If it is pointing upwards that means the trend is up. If it is pointing downwards that means trend is down. In that sense moving average is a trend indicator.
The main rule of trading with moving average is to look for the price to cross it. If price crosses below the it is the signal to sell the currency pair. If price crosses above the it's the signal to buy the pair. The period of averaging plays a significant role in generating trading signals. If period is small it will give high number of signals most of them will be false. But if the number of period is too high then such moving average will bee too lagging and giving the signals too late.
The simplest trading strategy based on MA
Let's consider an example of the simplest trading system.
Enter Long when price crosses above the MA(n)
Exit Long when price crosses below MA(n)
Enter Short when price crosses below MA(n)
Exit Short when price crosses above MA(n)
n is a parameter that needs to be adjusted to make a system profitable. Usually it can be found from backtesting.
More complex trading system
In the market when trend changes frequently going through consolidation phases trading system based on one moving average may not give very satisfactory results. It is necessary to employ some sort of filters. But moving average itself is a good filter.
The trick is to use two different periods of averaging. The shorter period curve will change quicker with the price while the longer period curve will be slower and filtering out the false crosses of the price. The signals will be based on crosses of those curves not the price. So the simple two moving average system will look something like.
Enter Long when MA(m) crosses above MA(n)
Exit Long when MA(n) crosses above MA(m)
Enter Short when MA(n) crosses below MA(m)
Exit Short when MA(m) crosses below MA(n). Where m < n are the parameters that need to be found out form backtesting to make a system profitable.
Albert Schmidt is a part-time currency trader. After quite a long time of struggle he learned to make consistent profit trading in Forex. Review a trading strategy he successfully uses in his trades.
There are many types of it but the most widely known ones are Simple Moving Average (SMA), Exponential (EMA) and Weighted (WMA). SMA is just an average of price over certain period of time. EMA and WMA tend to give more weight for the recent price therefore they are more sensitive for the quick price movements.
Trading signals based on MA
Moving averages filter out the small oscillations of the price movement giving out the main direction of the trend. If it is pointing upwards that means the trend is up. If it is pointing downwards that means trend is down. In that sense moving average is a trend indicator.
The main rule of trading with moving average is to look for the price to cross it. If price crosses below the it is the signal to sell the currency pair. If price crosses above the it's the signal to buy the pair. The period of averaging plays a significant role in generating trading signals. If period is small it will give high number of signals most of them will be false. But if the number of period is too high then such moving average will bee too lagging and giving the signals too late.
The simplest trading strategy based on MA
Let's consider an example of the simplest trading system.
Enter Long when price crosses above the MA(n)
Exit Long when price crosses below MA(n)
Enter Short when price crosses below MA(n)
Exit Short when price crosses above MA(n)
n is a parameter that needs to be adjusted to make a system profitable. Usually it can be found from backtesting.
More complex trading system
In the market when trend changes frequently going through consolidation phases trading system based on one moving average may not give very satisfactory results. It is necessary to employ some sort of filters. But moving average itself is a good filter.
The trick is to use two different periods of averaging. The shorter period curve will change quicker with the price while the longer period curve will be slower and filtering out the false crosses of the price. The signals will be based on crosses of those curves not the price. So the simple two moving average system will look something like.
Enter Long when MA(m) crosses above MA(n)
Exit Long when MA(n) crosses above MA(m)
Enter Short when MA(n) crosses below MA(m)
Exit Short when MA(m) crosses below MA(n). Where m < n are the parameters that need to be found out form backtesting to make a system profitable.
Albert Schmidt is a part-time currency trader. After quite a long time of struggle he learned to make consistent profit trading in Forex. Review a trading strategy he successfully uses in his trades.
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