Trading a proven strategy would be much more reliable if you want to get promising results. For MA traders, here are some tested moving average strategies to try.

Moving averages represent excellent methods of making the most of trading opportunities in the forex market. Moving averages majorly function as trend indicators because they are lagging indicators in which they only provide data on previous price behaviors rather than predicting future price movements. This allows them to be used in identifying support and resistance levels.

The two most popular moving averages are the Simple Moving Average (SMA), which is the average price over a particular set of time periods, and the Exponential Moving Average (EMA), which offers more weight to recent prices. These two moving averages form the basic structure of most tested moving average strategies and this article will be focusing on them.

Tested MA Strategy

 

Exponential Moving Average Trading Strategy

This strategy is designed to provide quick responses to price changes which enable traders to make appropriate decisions in good time before the market turns against them. The steps to use this strategy are:

  • Start by plotting three EMAs on a 15-minute chart. The three lines should include a 5-period EMA, a 20-period EMA, and a 50-period EMA.
  • To make a buying decision, the 5-period EMA must cross from a point below to a point above the 20-period EMA. Also, the price along with the 5-period and 20-period EMAs must be above the 50-period EMA.
  • For a selling decision, the 5-period EMA must cross from a point above to a point below the 20-period EMA. Also, the price along with the 5-period and 20-period EMAs must be below the 50-period EMA.
  • The initial stop-loss order should be placed below the 20-period EMA (for a buy trade) or about 10 pips from the entry price.
  • An optional step to consider is to move the stop-loss to break even once the trade becomes 10 pips profitable.
  • Finally, it is advisable to use a profit target of 20 pips or on the alternative, exit the trade when the 5-period drops below the 20-period for a buy trade or if the 5-period is above the 20-period for a sell trade.

Tested Moving Average Strategy

 

Moving Average Envelopes Trading Strategy

This strategy involves using percentage-based envelopes that are set above and below a moving average which can range from simple to exponential or weighted moving average. In fact, the type of moving average used does not really matter.

Usually, the envelopes are set to about 10- to 100-day periods while using "bands" with a distance of between 1-10% from the moving average on daily charts. For day trading, the envelopes tend to be less than 1%. The settings, especially the percentage, may require daily adjustment depending on the volatility. Therefore, it is advisable to use settings that match the envelope strategy with the daily price action.

To use this strategy, the best time to trade is when there is an overall strong directional bias to the price. Once the price is in an uptrend, traders should consider buying once the price starts to approach the middle band (MA) and begins to rally off of it. Alternatively, if the market is in a strong downtrend, traders should consider selling once the price reaches the middle band and then begins to drop away from it.

For a selling scenario, the stop-loss should be placed one pip above the recently formed swing high. If it is for a buying decision, the stop-loss should be placed one pip below the recently formed swing low. Preferably, exit the trade when the price approaches the lower band for a sell trade or the upper band for a buy trade. To mitigate risk, consider placing a target that is at least two times the risk. For instance, if you are risking 10 pips, the target should be placed 20 pips away from the entry price. This is a basic risk management strategy called the risk-to-reward ratio.

 

Final Words

While no trading strategy prevents trading losses, tested moving average strategies like the ones discussed above will enable the trader to make quick decisions that will maximize profits and reduce losses in the forex market. Also, it's important to remember that moving averages can be used on their own or in conjunction with other indicators or other trading strategies. The best markets for using the moving average strategy are strongly trending markets.