Saturday, 27 July 2019

Moving Averages Trading Strategy



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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