4.13 Moving Averages Trading Strategies

 
By now you already know that moving averages tend to act as resistances and supports and their crossovers, either with the price-action or other moving averages, serve the purpose of identifying trend reversals. Well, all these simply translate into trading signals for entry and exit.
 
Let's do something odd here, let's summarize it before even we explain how to trade with moving average. This summary first approach would work as you already have all the facts in place from previous lessons.
 
Moving averages are used in forecasting and to generate trading signals in following ways:
 

Single Moving Average Trading based on resistances and supports

 
  1. When moving average is acting as support, a signal for going long is generated when the price hits this support or comes close to it. In case you already have a short position then you may like to exit. In case of a sudden downward breakout of this support, it is better to wait for the closing price for that period. If the price does not retrace back to close above the support then it may be an indication that the support has failed and hence buying is not recommended. In such case please wait for one more price bar.
  2.  

    Trading with moving average as support. 

  3. If moving average is acting like resistance and the price hits it or comes close to it, you get a signal for going short. In case you already have a long position then you may like to exit it. In case of a sudden upward breakout, please wait to check the closing price for that period and decide to take an action only if the closing is above that resistance level. In fact it is better to wait for at least one more price-bar of the next period.
 
Trading with Moving average as resistance.
 

Single Moving Average Trading based on crossovers

 
  1. During an uptrend when price-action is continuously above the moving average line, any breakout of that indicates that the prices may further decline and signals that short-selling may be a good idea. For a trader who already has a long position, it signals exiting.
  2.  

  3. During a downtrend when price-action is continuously below the moving average line, an upside breakout indicates that a reversal may be on the cards and buying at that point may be something to be considered. Are you already on the short side? Well, you may like to exit here.
 

Double and Triple Moving Average Trading Strategies

 

Double Crossovers

 
In double crossover method two moving averages of different time-frames are used. 
 
  • A bullish or "buy" signal is generated when the shorter-term moving average (faster one) crosses over the longer-term moving average (slower one).

 

  • A bearish or "sell" signal is generated when the short-term moving average crosses below the longer-term moving average.
 
Trading with double moving averages crossover.
 

Triple crossover

 
As the name suggests, here we use three moving averages for different time periods. This method provides fewer but more surer signals. The first indication of buying or selling comes when the fastest moving average crosses over or below the moving average of middle time-frame. A confirmation comes when it crosses over or below the slowest moving average.
 
Triple moving averages crossover trading strategy.
 
The drawback of the triple crossover is that you may compromise some good signals because by the time the confirmation comes, the trend might have already lost the stream and a reversal may be on the way.
 
Please note that whatever trading system you use while trading with moving averages, remember that your trading decisions will be much better during trends. Moving averages during sideways moves always tend to give more false signals. As mentioned above, please do not rush to take an action in case of any sudden breakouts. Wait for the price-bar to close for the period to see if the breakout was false or not. Waiting for at least one more period may also be good at times when the volatility is high.
 

  

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