Moving Average Cross Trading Strategy
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Being one of the most widely used technical tools in the market; the Moving Average MA needs little introduction to seasoned FX traders. For those new to the FX world a Moving Average is a trend following tool used by chartists which helps determine the underlying trend by smoothing past price data. An understanding of the application of Moving Averages is an excellent addition to any traders knowledge base, although they are often under employed by many traders, perhaps due moving average trading system forex their simplicity.
This moving average trading system forex be a costly mistake as they are an excellent timing tool during trending markets, and adherence to their rules gives traders a convenient method for exercising discipline. Today I am going to discuss the triple crossover method to highlight the potency of using multiple moving averages to engage in strongly organised trends. Multiple moving average systems have the advantage of combining the strengths of shorter term and longer term moving averages, and attempt to address the reasons for the mixed returns found in empirical studies of single moving averages when compared with buy and hold strategies evidenced in equity market research.
A system combining short and long term moving averages targets a reduction in the false trade signals typical when using short term moving averages only, along with targeting a reduction of the lag in signals that occur when a system employs only longer term moving averages. One of the most widely used triple crossover systems is the day moving average combination popular amongst futures traders and introduced by R. Allen in his book, How to Build moving average trading system forex Fortune in Commodities.
Today I am going to demonstrate that the system can also be effective when applied to the foreign exchange area. Since shorter-term moving averages follow price more closely due to them averaging more recent prices the 4-day average will follow the trend most closely, followed to a lesser extent by the 9-day and then the day average.
During an uptrend the proper alignment will therefore be the 4 day average above the 9 day average, which will be above the 18 day average, with the reverse alignment applying during downtrends 4 day will be the lowest, followed by the 9 day and then the 18 day average.
A buy alert takes place in a downtrend when the 4-day average crosses above both the 9 and day averages. Confirmation of the buy signal is received when the 9-day average then crosses above the day moving average trading system forex giving us our desired moving average alignment. During a strong moving average trading system forex the averages will stay in the correct alignment although some inter-mingling may occur during consolidations and corrective movements, during which some traders may choose to take profit or alternatively add to positions, depending on how aggressive they wish to trade.
Sell alerts take place when the uptrend reverses to the downside, at this point the shortest and most sensitive 4 day average will dip under the 9-day and then the 18 —day average. Confirmation of the sell signal occurs when the next longer average 9- day drops below the day average, although some traders may wish to liquidate their longs when the 4-day first crosses the 9-day average.
Strict adherence to the rule will be to wait till the confirmation is received and the correct moving average alignment is in place to avoid premature exits. Looking at the chart for the period studied we can see that the triple crossover system called for 9 trades with the last trade currently being open. Marking the final trade at market of 1. In subsequent technical commentaries I will look at ways traders can mitigate this risk, in the meantime I encourage traders to test the effectiveness of using multiple moving average strategies like this one moving average trading system forex their favourite currencies across differing time periods.
Don't have an account? During his time there, he also managed their vanilla style options book. His FX trading experience has been G10 currencies with a focus on commodity currencies. MahiFX does not provide investment advice or recommendations, and no material on this site should be construed as such.
Opinions are those of the authors and not necessarily those of MahiFX, its officers or directors. Leveraged trading is high risk and not suitable for all. You could lose some or all of your deposited funds.