Profitable forex trading strategy can be built even on the most simple technical indicators such as Moving Averages. Using a combination of different types and settings for this widely used technical indicator as well as several general rules of Moving Averages’ behaviour could turn into a whole trading system which proved its profitability.
How to Use a Simple Moving Average?
The best type of the Moving Average depends on the timeframe you choose to trade. The Simple Moving Average (SMA) works in the best way for short-term timeframes intraday (M1, M15, M30, H1, H4). Longer timeframes with a wider scale need to have an additional filter and the best type would be the Exponential Moving Average (D1, W, MN). This simple moving average trading strategy uses two indicators with different settings – periods 21 and 70. This combination allows a trader to monitor trend reversals as well as oversold and overbought levels when the price is going too far from its average value based on previous periods.
In statistics, a moving average (rolling average or running average) is a calculation to analyze data points by creating a series of averages of different subsets of the full data set. It is also called a moving mean (MM) or rolling mean and is a type of finite impulse response filter.
Trading rules for the most simple strategy using Moving Averages are as follows.
After the price crossed one of the lines, we should wait a bit and see what would be the close rate of the current candle. This pause is needed for understanding if the reversal occurred. So, if the prices have reversed on the chart before reaching the second moving average (with the higher period of 70), then we enter the market on crossing (slightly earlier) of the first Moving Average with the period of 21.
The stop-loss order should be placed slightly behind the recent bottom or top (depending on the direction of your position).
his SMA trading strategy has certain disadvantages though. One of them is a large number of fake signals which could occur when the trend is reaching its final stage (going to reverse). But at the same time, there is a huge advantage of this strategy which is the fact that you will always follow the trend when trading on this system. Sometimes beginners wish to open too many positions against the main trend, but this is definitely not the winning approach in forex.
One more important feature of the most SMA strategy using two moving averages is that it gives a strong signal when the main trend reverses – both Moving Averages cross each other when that happens. If the shorter period Moving Average (21) crossed the longer one (period 70) from upside down, then the trend has been changed for the Descending and it’s the best time to sell the asset. And the opposite technical pattern gives the buy signal.