How To Trade With Moving Averages

Introduction

The moving averages also connoted as MAs are very easy but yet awesome tools for investors. The term MA describes the mean price of an instrument over a defined time period. If for instance we have the 14 day average of closing prices, this means that we are summing up the last 14 closes and divide by 14. The Moving Average provides investors with a simple measure of trend direction by smoothing price data.

Investors ought to know that the Moving Averages are lagging indicators and they do better when following a trend and are not good during ranging or trendless market conditions. This is one of the contributing factors that allows investors trade this indicator along trend as well its ability to identify support and resistance zones which invariably determines trend reversal or continuation.

How to Trade Moving Averages

To be able to trade using moving averages one should apply it on financial instruments that trend. The basic method that we’ll apply using the moving average is to buy when the price of the currency pair breaks above the moving average line and sell when the currency pair breaks below the moving average line.

To confirm the signals always wait for the entire candle to close above the moving average line before going bullish and allow the full candle close below the moving average line before going short. Let’s look at some couple of examples below;

Trend Following Strategy

Our first example is shown clearly in Fig 1. where we have each candle closing in each case fully below/above the moving average line. The next issue sits on where we would place stops, as we could apply placing stops according;

• For a bullish signal, the stop loss should be the low of the previous candle (the candle before the one that fulfilled the criteria) with a take profit of 30 pips.
• For a bearish signal, the stop loss should be the high of the previous candle (candle before the one that fulfilled the criteria) and a stop loss of 30 pips.

We applied the 14 SMA (Simple Moving Average) on the chart below.

How To Trade With Moving Averages

Moving Average Crossovers

This is another way to trade the moving averages by plotting a longer period moving average against a shorter period moving average on a chart and trading their crosses. The main strategy here is to go short when shorter period moving average crosses above the longer period moving average and go bearish when the shorter period moving average crosses below the longer term moving average.

The diagram below (Fig 2.) shows a red and a blue SMA (Simple Moving Average), the blue SMA represents the short period SMA while the longer period SMA is shown as a red line. We shall stick to stops like those on Trend following Strategy.

How To Trade With Moving Averages

SMA SETTINGS
Blue SMA: 14 SMA
Red SMA: 30 SMA

Entry rules:

You want to watch for the 14 EMA to cross the 30 EMA. You’ll have to be ready when this occurs. When the 14 EMA crosses the 30 EMA, you will either buy or sell, depending on which direction the EMAs are crossing. If its crossing up, you buy. If its crossing down, you sell. You might want to wait for the bar to close before placing the trade to make sure that this is a valid signal and not a false alarm. This way, youll filter out some of the fake crosses.

Exit rules:

First option: Close your trade when the 14 EMA crosses the 30 EMA again.

Second option: Or you can exit your trade when the 14 EMA comes back to touch the 30 EMA. Perhaps youll want to wait for the close of the bar to confirm that the 14 EMA has indeed crossed to the opposite of the 30 EMA.

Conclusion

It’s clear at this point in time the fact that moving averages are easy and they can help secure this. As you can see moving averages are very simple to use and can help to protect your capital.

The Best Moving Averages MetaTrader indicators: