What is the best moving average to use?
In answer to that question, there are many. There is not one particular moving average (MA) that anyone could claim is the best.
But here we are going to focus on some of my favourites for long-term, medium-term and short-term trading.
We will be using the daily charts along with the 4H charts and the 5 Minute charts.
What type of Moving Average
I always use the exponential moving average with my trading (EMA). This is my preferred MA over the simple and weighted moving averages.
There is also now the VIDYA moving average that I’m growing quite fond of as it is offering new ways and opportunities to trade.
However here we will only be using and concentrating on the EMA.
200 day EMA Longer Term Trading
The 200 day EMA is probably one of the most commonly used of all the moving averages
It can be used singularly where you trade the price above the EMA or below the EMA.
It can also be used with other short term period EMA’s to create a reliable crossover system.
The 200 day EMA is also commonly used to identify the direction of a trend.
If you look at this chart of the daily DAX you can see that you could have easily traded the price above and below the 200 day EMA and made some healthy profits.
As simple as it may seem that is a reliable trading strategy.
However, you can also add a smaller period moving average to create a very effective crossover strategy using the 200 day moving average.
200/5 Crossover Strategy
In this next chart you can see [although hard to] that I have added the 5 day EMA to the 200 moving average and have dropped down to use the 4H charts.
Each time the 5 EMA crosses the 200 EMA you open a trade and close the other.
Could have you any trading these crossovers? Of course you could have.
As with any strategy, you will have losing trades, but over the long-term using sensible staking and reliable moving averages you will come out on top.
Horses for courses
As mentioned in a previous post, for every chart there is a strategy and for every strategy there is a chart. It is your job as a trader to match this strategy and charts together.
Do not think that one EMA setup will work for each and every chart and timeframe, that is just unrealistic.
Medium-term Moving Averages 20/50
One of my favourite and most reliable EMA setups to trade currency pairs with is the 20/50 using the daily charts.
What’s more is that there 20/50 EMA crossovers can be used on most of the major currency pairs and even a few of the minor repairs.
I will say this again…. it is your job as the trader to find which charts suit the strategies that you are trying to use.
For every chart there is a strategy and for every strategy there is a chart.
As you can see from the charts beneath, using the 20/50 moving average crossovers on the daily charts is wickedly effective.
Trading like this takes the stress out of opening and closing your positions as you just trade along to the signals that the crossovers generate.
Again you’ll find that you will have losing trades, but these will be easily offset against your winning trades over Long-term. Remember trading is a marathon and not a Sprint
Short-term trading strategies using exponential moving averages
When using the shorter period moving averages, it is always better to use the smaller minute charts. Here we will be looking at trading strategies using five-minute charts to trade the DAX and 10/20 Exponential moving average.
The upside to using small time frame charts and the 10/20 EMA is that they can be used on most charts currency pairs and indices.
Your stop loss levels will also be smaller.
The downside is that you will get far more false signals.
However, over time and again with sensible bank management you can create some decent points profits on a daily basis.
The idea of this these short-term type of EMA strategies is that you will be in and out the markets many times in a single day.
This most certainly suits some traders and not others as you will need to be at your PC most of the day.
Take a look at the chart beneath, you can see many crossovers and trading opportunities. You’ll also see lots more false signals.
Moving averages are a great way to smooth out the price on a chart and give you a clear idea of direction of price.
Also you are getting the added benefit of signals [crossovers] telling you when to enter a trade.
If you are unsure about opening a trade and the direction on a chart, leave it. Do nothing. There will always be other, clearer opportunities once you learn to trade effectively.