A subscriber recently asked me…
“Rayner, what’s the one indicator you possibly can’t do without?”
Definitely, I replied, “Moving Average” (MA).
To be honest, I wasn’t a moving average trading strategy fan in my early years of trading. I had thoughts like…
“Indicators are useless since it’s lagging.”
“Indicators are for newbies.”
8 years later… I can let you know, I’m mistaken.
The moving average is some of the versatile trading indicators I’ve come across, and it will possibly be utilized in other ways you never thought possible.
So, here’s what you’ll learn today:
Warning:
This isn’t a basic guide where you’ll learn the difference between easy, exponential, or weighted MA (you possibly can google them yourself).
These are advanced moving average trading strategies that I’m using to trade the markets (and a few of them you’ve probably not seen before).
Are you ready?
Let’s go.
The best way to use moving average to trade with the trend
I’m sure you’ll agree with me after I say that a downtrend consists of lower highs and lows, right?
But… sometimes you get the next high in a downtrend, so does it mean the trend is over?
An example:
Rome was not inbuilt a day, and no real movement of importance ends in sooner or later or in a single week. It takes time for it to run its logical course. – Jesse Livermore
Here’s the thing…
Simply because you get lower high (and lower low) in an uptrend, doesn’t mean the trend is over.
It may very well be a complex pullback, before the resumption of the trend.
Here’s an example:
So, you’re probably considering:
“How can I higher define a trend objectively?”
Well, you may use the MA indicator to assist you to.
Here’s learn how to read moving average and use it to trade with the trend…
If the value is above the 200 EMA and 200 EMA is pointing higher, then the market is in a long-term uptrend (of your given timeframe).
And… if the value is above the 20 EMA and 20 EMA is pointing higher, then the market is in a short-term uptrend (of your given timeframe).
Does it make sense?
Next…
You possibly can gauge the strength of a trend by the steepness of the MA.
The steeper the MA, the stronger the trend. And the flatter the MA, the weaker the trend.
Here’s what I mean:
If you need to learn more, go watch this training video below:
The best way to use the moving average to discover value in your chart
You’ve probably heard the saying “buy low and sell high”.
However the query is… how do you define what’s high and low?
That is where the MA indicator can assist.
Now, you’re wondering:
“Which MA should I exploit?”
Here’s the thing…
There’s no best MA on the market.
Somewhat, you’ll want to find something that is aligned with your trading approach.
If you happen to’re attempting to trade long-term trends (in your given timeframe), then the 200 EMA would suit you.
If you happen to’re attempting to trade mid-term trends (in your given timeframe), then the 50 EMA would suit you.
Personally, I exploit the “space” between 20 & 50 EMA to define the realm of value.
Here’s an example:
Pro tip:
MA works best in trending markets. Avoid using them in range markets.
The best way to use the moving average to set your stop loss
One other term you’ll want to understand is dynamic Support & Resistance (SR).
These are areas of value in your chart that is identified using MA (what you’ve learned earlier).
And this is usually a powerful technique to set your stop loss.
Let me explain:
When the market is trending, price tends to bounce off at dynamic SR (which is an area of value).
You possibly can consider it as a “barrier” that stops the price from going through it.
Thus, in case you were to set your stop loss just beyond the dynamic SR, would not it make sense?
Your trade will probably be protected by the “barrier” which reduce the likelihood of your stops being triggered.
Listed here are just a few examples…
Dynamic resistance at (USD/SGD):
Dynamic support at (SOYBNUSD):
Dynamic support at (DE10YBEUR):
Does it make sense?
Great let’s move on…
The best way to use the moving average indicator to raised time your entries
Now:
What I’m about to share with you’ll greatly improve your trading entries.
You’ve learned that in a trending market, MA can act as dynamic Support & Resistance (SR), which is an area of value to trade from.
And, in case you haven’t realized…
The market is sort of a “rubber-band”. It’ll snap back if it’s stretched too far-off from the dynamic SR.
Now you’re probably wondering:
“How does this help with my trading entries?”
Well, take into consideration this.
If the market “overextended”, then chances are high it would pull back towards the MA.
Thus, in case you’re trying to enter your trades, you’ll probably get stopped out because the market retraces against you.
So…
If you need to higher time your entries, look to enter your trades at an area of value (like dynamic SR), and never when it’s removed from the MA.
Is smart, right?
Exercise:
Take a look at your past trades and spot how a lot of your losers are derived from trading far-off from the MA.
You’d be surprised at your findings.
The best way to use moving average indicator to ride massive trends
Let me let you know a secret.
The one way so that you can ride a trend is to don’t have any profit targets. Why?
Take into consideration this… if you will have a profit goal, what you’re doing is putting a limit in your profits.
And, how are you going to ride a trend in case you limit your profits?
Now… I’m not saying having a profit goal is mistaken because swing traders do tremendous with a set profit goal.
But when you need to ride a trend, then having a profit goal is contradicting.
Now you’re probably considering:
“Okay, Rayner. I understand I cannot have a profit goal if I would like to ride a trend. So, learn how to read moving average to ride the trend then?”
Easy.
By trailing your stop loss. And the MA indicator lets you just do that.
Also…
You’re probably aware that in a trending market, MA can act as dynamic SR.
And from time to time, it will possibly be respected by the markets for an extended time frame (and I mean really long).
Listed here are just a few examples…
Riding the rally at (DE10YBEUR):
Riding the rally at (USD/ZAR):
Riding the sell-off at (BCOUSD):
Pro Tip:
The parameter of your MA will dictate the sort of trends you’ll capture.
A brief-term MA (like 5 EMA) will allow you to ride short-term trends. Whereas a long-term MA (like 200 EMA) will allow you to ride long-term trends.
The best way to use the moving average to discover the most effective markets to trade
Imagine…
You’re going to compete in a drag race, with a top prize of $100,000.
You’ve got two selections of cars. Bugatti Veyron or Toyota Vios.
Which is able to you decide?
You’re obviously going to pick the Bugatti Veyron, right?
It has more horsepower, it’s faster, and with a greater braking system.
Now you’re probably wondering:
“What does it must do with trading?”
Well, it’s the identical.
If you need to long, you’d need to long the strongest market. And if you need to go short, you’d need to short the weakest market.
This lets you pick the most effective market and have the next probability of the trade understanding.
So, how do you decide the most effective market?
Through the use of an idea called, relative strength.
There are numerous methods to find out relative strength. But considered one of the simplest ways is to make use of MA.
Here’s my 3 step process…
Step 1: Pick the markets that are throughout the same sector.
If you happen to’re indices, then compare markets like S&P, Nasdaq, Dow etc.
If you happen to’re USD, then compare currency pairs like AUD/USD, NZD/USD, USD/CAD, USD/JPY, EUR/USD etc.
Step 2: Plot the 20 & 50 EMA in your charts.
Step 3: Compare the steepness of the MA. The steeper it’s, the stronger/weaker the market
In this instance, let’s compare the relative strength between USD/CAD and USD/JPY:
For USD/CAD, the MAs are steep and clearly pointing downwards for the time being.
So you need to be shorting USD/CAD as an alternative of USD/JPY (since it’s a comparatively weaker market).
That is powerful stuff, right?
Let’s move on…
A moving average trading strategy that enables you to capture big trends
This will not be an MA crossover strategy.
As an alternative…
You’re going to make use of the MA indicator to discover areas of value in your chart.
Then you definately’ll get an entry into an existing trend and ride it for all it’s value.
Sounds good?
Listed here are 7 questions you’ll want to ask yourself:
- Which period frame are you trading
- How much are you risking on each trade
- Which markets are you trading
- What are the conditions of your trading strategy
- Where will you enter
- Where will you exit in case you’re mistaken
- Where will you exit in case you’re right
Timeframe
You need to select a time-frame that suits your personality and schedule.
If you happen to’re someone who holds a day job, trading the 4 hour and day by day charts can be suitable.
Risk management
You need to risk a fraction of your equity on each trade to survive the inherent drawdowns. Keep your risk to not more than 1% of your trading account.
Markets universe
You need to have the option to trade about 60 markets from these 5 sectors.
- Agriculture commodities
- Currencies
- Equities
- Rates
- Non-Agriculture Commodities
Here’s the precise moving average trading strategy you should utilize…
If 200 EMA is pointing higher and the value is above it, then it’s an uptrend (trading conditions).
If it’s an uptrend, then wait for “two test” on the dynamic support (using 20 & 50-period MA).
If price test dynamic support twice, then go long on the third test (your entry).
If long, then place a stop lack of 2 ATR out of your entry (your exit in case you’re mistaken).
If the value goes in your favor, then take profits when candle close beyond 50 EMA (your exit in case you’re right).
Vice versa for a downtrend
Listed here are just a few moving average trading strategy examples…
A winning trade set-up at (XAU/USD):
A winning trade set-up at (BCOUSD):
A losing trade set-up at (AUD/USD):
Some vital considerations to ask yourself:
- Do you wait for price “confirmation” before entry?
- What markets are you trading?
- Which timeframes are you trading?
- How much will you risk on each trade?
There aren’t any hard and fast rules for this trading strategy.
As an alternative, you’ll tweak the MA trading strategy in keeping with your individual personality and time commitment.
If you need to learn more Moving Average SECRETS, then try this video here:
Ceaselessly asked questions
#1: Hey Rayner, I see that you just’re all the time using EMAs. But is EMA or SMA higher for trend trading?
To be honest, there’s no best sort of moving average to make use of. EMA is just more responsive in comparison with SMA, due to the way in which the EMA is calculated.
But within the grand scheme of things, the concept is what matters more and never whether you need to use EMA, SMA, WMA, etc.
#2: While you use the space between 20 & 50EMA to define the realm of value, do you utilize that space to signal that the trend goes to proceed? Or do you utilize that space to signal a change in trend?
The space between the 20 and 50EMA is to define an area of value, I don’t use it to find out if the trend is coming to an end or not.
But what’s of course is that this:
- If the 2 MAs begin to converge, the market goes through a pullback
- If the 2 MAs begin to diverge, it’s when the trend is constant
#3: Are you able to elaborate on what you think about as short term, medium term and long run trend?
How the value respects the moving average is beneficial to assist you to define the sort of trend (whether it’s a powerful, healthy or weak trend).
But whether you think about a trend to be a brief term, medium term or long run trend, will rely upon your timeframe:
- For brief term trends, you possibly can have a look at timeframes below the 1-hour timeframe
- For brief to medium term trends, you possibly can have a look at the 1-hour to 4-hour timeframe
- For medium term trends, you possibly can have a look at the 4-hour to day by day timeframe
- For long run trends, you possibly can have a look at any timeframe above the day by day timeframe
#4: Should I modify the MA’s period in keeping with the timeframe I’m trading on?
It’s not needed. I’ll normally have 3 different moving averages to define the three sorts of trends:
- 20MA to discover strong trends
- 50MA to discover healthy trends
- 200MA to discover weak trends
So even once you change the timeframe, you should utilize those 3 moving averages to discover the sort of trend the market is exhibiting. If the market respects not one of the above moving averages, then you definitely can just remove those moving averages.
If you need to discover more on learn how to read moving average and find out about various kinds of trends to level up your trend trading game, you possibly can read all about them here.
To recap, here’s what you’ve got learned today…
The Moving Average indicator helps you:
- Discover the trail of least resistance
- Discover areas of value in your chart
- Set your stop loss
- Higher time your entries
- Ride massive trends
- Pick the most effective markets to trade
I hope this opens your eyes to how powerful MA could be, and you’ve got managed to select up a thing or two along the way in which.
Now here’s the subsequent step…