The moving average technical analysis tool creates an average price that is constantly updated to help smooth out price data. You can take the average over a certain period, like 20 minutes, 10 days, or even 30 weeks, depending on your preference. Any forex trader can use several moving averages to create a trading strategy that will help him/her take advantage of available trading opportunities.
Typically, moving strategies are used as trend indicators in forex trading. The MAs can also identify the different levels of support and resistance. Read more below!
There are two popular moving strategies in forex trading. These include:
- Simple moving average – this is the average price over a particular period
- Exponential moving average – this gives weight to recent prices.
The Forex Trading Moving Strategies
1. Trading Strategy
This MA trading strategy utilizes the exponential moving average because it is designed to respond fast to the price changes. Below are the MA trading strategy steps:
- Plot three EMAS, which are 5-period, 20-period, and 50-period EMAS, on a 15-minute chart.
- Only buy when the 5-period exponential moving strategy moves above the 20-period exponential moving strategy. The 5 and 20 periods EMAs should also be above the 50-period EMA for you to buy trade.
- When selling a trade, sell when the 5-period EMA goes below the 20-period EMA. Both the 5-period and 20-period EMAs should be below the 50 EMA for you to sell a trade.
- You should place your initial stop-loss order about 10 pips from the entry price or below the 20 EMA for a buy trade.
- If the trade is about 10 pips profitable, you can move your stop-loss order to break even.
- You can either place a profit target of 20 pips or exit the trade when the 5 period moves below the 20-period (long) or above the 20-period (short).
Different forex traders use different MA lengths when executing their trades. It is upon you to determine the time frames that work best for you to gain the best profits and avoid losses.
2. Envelope Trading Strategy
The MA envelopes are usually percentage-based that are set either above or below an MA. Traders have the freedom to use either the weighted MA or exponential MA because this strategy does not limit you to one MA.
To trade using this envelope strategy, traders should test several percentages and currency pairs and time intervals. You should, however, change the percentages regularly depending on the trades volatility. Also, you should trade when the overall directional bias is strong to be on the safe side.
3. Ribbon Trading Strategy
This strategy can help you to create a simple forex trading strategy. The strategy you create can be based on the slow transition of a trend change, either up or down. The ribbon moving strategy is created using 8 to 15 exponential moving strategies varying from short to long-term averages. All the averages are plotted on one chart.
The ribbon moving averages are used to indicate the trend direction and strength. If the trend is strong, the MAs’ angle will be steep and have a big separation between them. This separation causes the ribbon to widen or fan out.
The sell or buy signals for the ribbon strategy use the same crossover signals as the other MA strategies. Since many crossovers are involved, a trader should decide how many crossovers will make a good trading signal.
4. Convergence Divergence Trading Strategy
The MA Convergence Divergence Trading Strategy utilizes a histogram that shows the difference between the 26-period and 12-period exponential moving strategies. You can then plot a 9-period EMA as an overlay on the MACD histogram. Typically, the histogram will show either negative or positive readings with a zero baseline.
The MACD trading strategy is used as momentum in forex trading. It also indicates market trends and direction to help you execute safe trades.
5. Guppy Multiple MA Trading Strategy
The GMMA trading strategy comprises of two different EMA sets. These include:
- The first set comprises EMAs of the first 3,5 8, 10, 12, and 15 trading days. This set indicates the direction and sentiments of short-term traders.
- The second set indicates sentiments and directions of long term traders, and it comprises EMAs for the 30, 35, 40, 45, 50, and 60 days.
The long-term trend may be wearing out if the short-term trend does not gain support from long-term trends.
The moving averages and their trading strategies work best in strong trending markets. You should therefore decide on what strategy you will employ for your long-term or short-term trade. Whichever strategy you choose, ensure it works best for you.