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Forex strategies moving average

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Moving average envelopes are percentage-based envelopes set above and below a moving average. The type of moving average that is set as the basis for the envelopes does not matter, so forex traders can use either a simple, exponential or weighted MA. Forex traders should test out different percentages, time intervals, and currency pairs to understand how they can best employ an envelope strategy.

On the one-minute chart below, the MA length is 20 and the envelopes are 0. Settings, especially the percentage, may need to be changed from day to day depending on volatility. Use settings that align the strategy below to the price action of the day.

Ideally, trade only when there is a strong overall directional bias to the price. Then, most traders only trade in that direction. If the price is in an uptrend, consider buying once the price approaches the middle-band MA and then starts to rally off of it. In a strong downtrend, consider shorting when the price approaches the middle-band and then starts to drop away from it. Once a short is taken, place a stop-loss one pip above the recent swing high that just formed. Once a long trade is taken, place a stop-loss one pip below the swing low that just formed.

Consider exiting when the price reaches the lower band on a short trade or the upper band on a long trade. Alternatively, set a target that is at least two times the risk. For example, if risking five pips, set a target 10 pips away from the entry. The moving average ribbon can be used to create a basic forex trading strategy based on a slow transition of trend change. It can be utilized with a trend change in either direction up or down.

The creation of the moving average ribbon was founded on the belief that more is better when it comes to plotting moving averages on a chart. The ribbon is formed by a series of eight to 15 exponential moving averages EMAs , varying from very short-term to long-term averages, all plotted on the same chart. The resulting ribbon of averages is intended to provide an indication of both the trend direction and strength of the trend.

A steeper angle of the moving averages — and greater separation between them, causing the ribbon to fan out or widen — indicates a strong trend. Traditional buy or sell signals for the moving average ribbon are the same type of crossover signals used with other moving average strategies.

Numerous crossovers are involved, so a trader must choose how many crossovers constitute a good trading signal. An alternate strategy can be used to provide low-risk trade entries with high-profit potential. The strategy outlined below aims to catch a decisive market breakout in either direction, which often occurs after a market has traded in a tight and narrow range for an extended period of time.

To use this strategy, consider the following steps:. Additionally, a nine-period EMA is plotted as an overlay on the histogram. The histogram shows positive or negative readings in relation to a zero line. While most often used in forex trading as a momentum indicator, the MACD can also be used to indicate market direction and trend. There are various forex trading strategies that can be created using the MACD indicator.

Here is an example. The first set has EMAs for the prior three, five, eight, 10, 12 and 15 trading days. Daryl Guppy, the Australian trader and inventor of the GMMA, believed that this first set highlights the sentiment and direction of short-term traders. A second set is made up of EMAs for the prior 30, 35, 40, 45, 50 and 60 days; if adjustments need to be made to compensate for the nature of a particular currency pair, it is the long-term EMAs that are changed.

This second set is supposed to show longer-term investor activity. If a short-term trend does not appear to be gaining any support from the longer-term averages, it may be a sign the longer-term trend is tiring out. Refer back the ribbon strategy above for a visual image. With the Guppy system, you could make the short-term moving averages all one color, and all the longer-term moving averages another color. Watch the two sets for crossovers, like with the Ribbon.

When the shorter averages start to cross below or above the longer-term MAs, the trend could be turning. Technical Analysis. The longer its length, the more data points that are included in the moving average calculation, which means the less any single price can affect the overall average. Either situation can make it difficult to recognize if price direction may change in the near future. How can I use this to trade? Just like in every other lesson in the BabyPips. Before we move on, just remember that moving averages smooth price data to form a trend-following technical indicator.

They do NOT predict price direction; instead, they define the current direction with a lag. Are you ready? It's not who I am underneath - it's what I do that defines me. Bruce Wayne.

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Moving average is one of the most widely used technical indicators for validating the movement of markets. Few other indicators have proved to be as unbiased, definitive and practical as the moving average. Moving averages help traders identify trends and empower them to increase the number of profitable trades by making those trends work in their favour.

Moving averages occasionally referred in this blog post as MA are the averages of a series of numeric values. They have a predefined length for the number of values to average and this set of values moves forward as more data is added with time. Given a series of numbers and a fixed subset size, the first element of the MA series is obtained by taking the average of the initially fixed subset of the number series.

The subset is then modified by shifting it forwards by one value, i. Consider the example mentioned below to understand the calculation of simple moving averages. Let the average be calculated for five data points underline denotes the subset used for calculating the average. It can be seen that the subset for calculating averages moves forward by one data entry, consequently the name moving average also called running average or rolling average.

A moving average series can be calculated for any time series. In financial markets, it is most often applied to stock and derivative prices, percentage returns, yields and trading volumes. The price of securities tend to fluctuate rapidly, as a result the graphs contain several peaks and troughs making it difficult to understand the overall movement.

Moving averages help smoothen out the fluctuations, enabling analysts and traders to predict the trend or movement in the price of securities. Larger subsets for calculating moving averages will generate smoother curves and contain lesser fluctuations.

These moving averages are slower to respond to a change in trend and are called slow moving averages. The moving averages with shorter durations are known as fast moving averages and are faster to respond to a change in trend. Slow moving averages are also called larger moving averages as they have a larger subset for computing the average. Similarly fast moving averages are also called smaller moving averages. A faster MA has less lag when compared to the slower MA. Consider the chart shown above, it contains the closing price of a futures contract blue line , the 10 day moving average red line , the 20 day moving average green line and the 50 day moving average purple line.

It can be observed that the 50 day MA is the smoothest and the 10 day MA has the maximum number of peaks and troughs or fluctuations. As the lookback period increases, the moving average line moves away from the price curve.

The red line 10 day MA is closest to the blue line price curve and the purple line 50 day MA is farthest away. If one were to shift the MA lines in order to overlap them with the price curve, the shift would have to be made in the direction of negative x-axis, this confirms the lagging property of the MA lines. The 50 day MA would require the maximum shift, meaning that slower moving averages have greater lag than the faster moving averages. The slower moving average is slower in responding to changes in the price curve.

There are different types of moving averages that can be used to develop a vast variety of moving average strategies, let us now look at a few of these in more detail. There are many different types of moving averages depending on the computation of the averages. The five most commonly used types of moving averages are the simple or arithmetic , the exponential, the weighted, the triangular and the variable moving average.

The only noteworthy difference between the various moving averages is the weight assigned to data points in the moving average period. Simple moving averages apply equal weight to all data points. Exponential and weighted averages apply more weight to recent data points. Triangular averages apply more weight to data in the middle of the moving average period. The variable moving average changes the weight based on the volatility of prices. A simple or arithmetic moving average is an arithmetic moving average calculated by adding the elements in a time series and dividing this total by the number of time periods.

As the name suggests, the simple moving average is the simplest type of moving average. It is arguably the most popular technical analysis tool used by traders. All elements in the SMA have the same weightage. The SMA is usually used to identify trend direction, but it can also be used to generate potential trading signals.

The formula for calculating the SMA is straightforward:. The simple moving averages are sometimes too simple and do not work well when there are spikes in the price of the security. Exponential moving averages give more weight to the most recent periods.

This makes them more reliable than the SMA and a better representation of the recent performance of the security and hence can be used to create a better moving average strategy. The EMA is calculated as shown below:. For example, a 10 period EMA applies a weightage of The name exponential moving average is because each term in the moving average period has an exponentially greater weightage than its preceding term.

The exponential moving average is faster to react than the simple moving average, this can be seen in the chart below blue line represents the daily closing price, red line represents the 30 day SMA and the green line represents the 30 day EMA. The following extract from John J. First, the exponentially smoothed average assigns a greater weight to the more recent data. Therefore, it is a weighted moving average. But while it assigns lesser importance to past price data, it does include in its calculation all the data in the life of the instrument.

In addition, the user is able to adjust the weighting to give greater or lesser weight to the most recent day's price, which is added to a percentage of the previous day's value. The sum of both percentage values adds up to The weighted moving average refers to the moving averages where each data point in the moving average period is given a particular weightage while computing the average.

The exponential moving average is a type of weighted moving average where the elements in the moving average period are assigned an exponentially increasing weightage. A linearly weighted moving average LWMA , also generally referred to as weighted moving average WMA , is computed by assigning a linearly increasing weightage to the elements in the moving average period. If the moving average period contains ten data entries, then the most recent element the tenth element will be multiplied by ten, the ninth element will be multiplied by nine and so on till the first element which will have a multiplier of one.

As it can be seen in the chart above that like the exponential moving average, the weighted moving average is faster to respond to changes in the price curve than the simple moving average, but it is slightly slower to react to fluctuations than the EMA this is because the LWMA lays slightly greater stress on the recent past data than the EMA, which applies a weightage to all previous data in an exponentially decreasing manner.

The triangular moving average is a double smoothed curve, which also means that the data is averaged twice by averaging the simple moving average. TMA is a type of weighted moving average where the weightage is applied in a triangular pattern. Follow the steps mentioned below to compute the TMA:. Consider the chart shown above, which comprises of the daily closing price curve blue line , the 30 day SMA red line and the 30 day TMA green line.

It can be observed that the TMA takes longer to react to price fluctuations. The trading signals generated by the TMA during a trending period will be farther away from the peak and trough of the period when compared to the ones generated by the SMA, hence lesser profits will be made by using the TMA.

However, during a consolidation period, the TMA will not produce as many unavailing trading signals as those generated by the SMA, which would avoid the trader from taking unnecessary positions reducing the transaction costs. The variable moving average is an exponentially weighted moving average developed by Tushar Chande in Chande suggested that the performance of an exponential moving average could be improved by using a Volatility Index VI to adjust the smoothing period when market conditions change.

Volatility is the measure of how quickly or slowly prices change over time. The purpose of developing the VMA was to slow down the average when prices are in the consolidation period to avoid unavailing trading signals and to speed up the average when the market is trending so as to make the most out of the trending prices. Given below is the method for calculating the variable moving average:. The triple moving average strategy involves plotting three different moving averages to generate buy and sell signals.

As a rule, it is set to default unless otherwise required by the trading system. Simple Moving Average is represented as a line and is calculated based on the arithmetic means of the previous price values. The bigger the period the number of values taken into account , the smoother and more remote from the price chart, the moving average will be. For example, if daily closing prices on a 5-day chart were at 1.

To obtain the next 5-day SMA value, we need to drop 1. After that, you will see a window where you will need to select Simple in the MA Method. Other settings depend on the trading strategy conditions. SMA is the most popular MA type, and it lies at the core of many strategies. Despite the fact that SMA is rarely used without additional indicators, there are some strategies that employ only SMA. The Sweet Chariot strategy is designed for medium- and short-term trading, the optimum timeframes are D1 or W1.

Trading with 1-hour or 4-hour charts is also possible, however, the bigger the time frames, the more precise the trend will be. And trading with the trend is the key to success with this strategy. The signal indicator is period SMA. Stop loss is set below the minimum or above the maximum of the low candle. The profit can be locked using both take profit for example, its distance can be three times or more larger than the stop loss value or trailing stop.

The Sweet Chariot is quite an old strategy. Despite the fact that the traditional version does not use any oscillators, some traders can add other tools like ADX. The Chariot works really well with the trend. However, it is only logical to use a filter to minimise the risks of entering the flat market. The EMA formula is rather complex, but, essentially, it means that a period EMA will give the most weight to the previous price values and the closing price of the 10th candle in reverse order will have almost no effect.

This MA has been developed to facilitate a smoother transition between the time frames. As a result, a line with the same period is smoother and closer to the chart, and its signals are less dependent on the large but outdated values. The only difference is that you will need to choose Exponential as the MA Method in the indicator window. After testing and revising, this modification can prove more profitable and effective than the traditional SMA system.

It is a well-known combination of a trend indicator, which determines the trend direction, and the oscillator that helps in choosing the best moment to enter the market. This strategy is suitable for any time frame, but we recommend it for short-term trading with MH1 charts.

The system is quite simple and does not involve any strict requirements for exiting the market. The position can remain open until the reverse signal is received or you can set stop loss and take profit parameters.

However, with WMA the weight is calculated in geometric and not arithmetic series. For example, for a 5-period MA the weight of the last price value will be 5, the one before that will be 4 and so on until it reaches 1. The WMA is set in the same way as the previous ones. The only difference is that you will need to choose Linear Weighted as the MA Method in the indicator window.

There are not that many trading strategies that use WMA. Usually, these are advanced strategies that have been developed by experimenting with and modifying more simple systems. A short position is open in the following cases:.

Conversely, a long position is open. This strategy was developed by traders from the West several years ago, and it was praised on the forums. Nevertheless, some specialists think that three WMAs 30, 60 and 90 periods are superfluous and could be removed without affecting the quality of the trading signals.

Traders are free to decide on how to exit the market, however, stop loss is mandatory according to all the risk management rules. This type of MA takes into account not only the price values within the set period but also some historical data. Although the priority is given to the weight of the more recent data, the historical values also affect the final results.

Smoothed moving average is set in the same way as all the previous ones: traders choose the period, shift and style and then select Smoothed as the MA Method. Smoothed Moving Average is the least popular MA type. It is rarely used in any trading strategies and mainly employed in complex automated trading systems or as part of custom indicators.

Moving Average is a universal tool. It is suitable for any timeframes and assets. There are plenty of different trading strategies and approaches that use moving averages. Below are the most basic ones. This is the most basic and universal approach. Since only one indicator is needed for the analysis, the position should be open when the price crosses the MA:. One MA can help catch a major trend, but before that, you might have to open several losing positions.

That is why you have to set a stop loss for each position and allow the profit to grow, thus compensating for the previous losses. This approach is similar to the previous one, but here the chart has two MAs with different time parameters. The signal will be the intersection of the two MAs:.

As becomes clear from the example, the second MA allows you to filter out many false signals. Then again, there is another problem, which is connected with lagging. It often happens that the two MAs intersect only when half of the trend is already behind.

Together with MA, it acts as a filter. But which are the best moving averages to use in forex trading? That depends on whether you have a short-term horizon or a long-term horizon.