Saturday, 27 July 2019

Moving Averages Trading Strategy

By Deya Hroob 

Moving Averages Crossover CHART
Moving Averages Crossover


We can use Moving Averages in numerous trading strategies but in this article, we will focus on A crossover strategy.

This strategy works when the market is trending, but if the market is choppy or moving in sideways,this strategy may provide false signals.

In this strategy, we use 5-day EMA with the 20-day EMA crossover. You can test different EMAs length or time frames to see which works best for you.

 To eliminate false breakouts, we should use another tool as a support of our view. In our strategy, we will use the Volume as a confirmation tool.

We open long positions when 5-day EMA crosses above the 20-day EMA accompanied by high volume. We open shorts when 5-day EMA crosses below the 20-day EMA accompanied by high volume.



Let's take an example, below is a daily chart of Gold, as you can see the 5-day EMA crosses above the 20-day EMA. Notice how the volume increasing after the breakout, thus, we take it as a confirmation to open a long position.

After this breakout Gold made a significant profit.

Moving Averages Crossover2

Let's take another example which gave us two signals. This is ETHUSD daily chart. Firstly, the 5-day EMA crosses above the 20-day EMA accompanied by huge volume which validates our buying position. After the breakout, Ethereum rose more than 50%.
 


The second signal came when 5-day EMA crosses below the 20-day EMA, also the volume increases compared to the previous days, thus, we opened a short position with confidence. Ethereum declined from $280 to around $200 after the breakout.
Moving Averages Crossover eth

Now, let's take an example of false signals. Below is a daily chart of EOSUSD. As shown from the chart in the late of April, 5-day EMA crosses below the 20-day EMA, however, the volume was weak which doesn't support a bearish view. Look carefully how the volume goes up each time 5-day EMA is above the 20-day EMA, which indicates the bullish view is still strong.

Moving Averages Crossover eos
Even if we can make some profit using this strategy during a sideways market, but we don't recommend trading it to avoid false breakouts.

Moving Averages Crossover xau

 

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