Using a triple moving average system to determine price direction is a great way to choose entry points into a market. Not only that, you can also use the moving averages as a trigger to exit the market too.
I’ll show you how later on.
The triple moving average can be used to trade longer term trends as well as short term day trading.
Triple moving average system
So let’s look at what a triple moving average system can do for us over the short to medium term first. Then we can look at using triple moving averages to day trade.
The triple moving average can offer the trader a good indication as to what direction a market is likely to go in. As always this is never going to be 100% accurate… but it is pretty dam accurate… and certainly enough so to help you profit from the markets.
This type of trading is also what can be classed as mechanical, meaning that the entry and exit points are clear and that no guess work is involved.
Don’t get Confused
A Triple Moving Average System is not the same as the triple moving average indicator or TEMA.
I am adding 3 separate EMA’s to my chart to create a crossover signal that I can enter the market on but also exit the market when other criteria are met using the same three EMA’s.
The TEMA is a single line standalone indicator that is configured by smoothing the price of a single equity [stock, ETF, indices] value 3 times using an EMA [exponential moving average] which is then used to calculate the result in the combined EMA’s from the previous results [prices]
What? Well that is the technical explanation of a TEMA.
Basically, all you need to know is the TEMA is something completely different to what we are using here.
If you want to read more about the TEMA indicator you can do here.
We are NOT using the TEMA indicator or system.
Triple Moving Average System Settings
First off, we are going to set our moving averages. We are going to use 10-20-50 exponential moving average [EMA]
These settings are going to be added to a 4hour chart and will enable us to look at trading from days-weeks at a time.
Whatever charts you use, this setting is one of the most common and easiest to add to any chart.
[This triple moving average crossover system can be used for trading binary options or spread betting and is compatible with most chart durations up to a day.]
In our first example we are using the EUR/USD 4 hour charts.
You can see that we have added our moving averages to our chart. You can also see that there is a clear Triple Moving average [TMA] crossover on the 15th May.
Our TMA has formed a crossover, the price [candles] are moving above the moving averages. This is indicating a buy signal. We are expecting the price to move up from here.
If we now look and compare the first signals that we can see on the chart, we can see what not to do when trading using this strategy.
If we go back another week we can see that the price has started to move down from around the 8th May. There was a crossover of the 10/20 EMA.
This was not a triple moving average sell signal to enter the market, as the 10 and 20 day EMA are both above the 50 EMA.
A valid entry signal can only be considered such if the price [candles] are above or below all 3 moving averages 10,20,50.
There is however a time and place to use this particular signal [10,20 crossovers above and below the 50 EMA] within our TMA system, but just not for entry. I’ll explain in a moment.
Explaining the Triple Moving Average System and Signals
If we follow our trend up until around the 26th May, you will see that the price continues to climb until we get another crossover.
This is our exit signal. You can clearly see that the purple 10 EMA crosses the Yellow 20 EMA on the 26th. And that the candles move below this crossover.
You can also see that the 50 EMA is still beneath the crossovers and price.
The reason that we trade out when we get a crossover signal of the 10/20 EMA is that we obviously want to take a greater share of profits when ever possible. If we wait for another triple moving average to signal our exit position, then we eat into our gains far to much.
So, if we open our position after a triple moving average crossover signal, then we are buying on a stronger signal than just using a double moving average. We are waiting for 3 crossovers with the longest period being 50. This means we are looking for further clarification to enter our trade instead of using just the double [2 moving averages] crossover signal.
However, on exiting a trade, we are looking for a weaker signal to get us out of the position and take our profits… hence using the 10/20 EMA. We then wait for the next TMA signal to enter the action again.
So in short, we are entering the market on strength [the triple moving average signal] and exiting on weakness [the double moving average signal] .
All markets can be Traded
The great thing about using a triple moving average system is that it can be applied to practically all other markets and all other candle time frames.
Shares, Indices, FX, ETF’s can all be traded using a triple moving average system.
Look at this chart of the German 30 DAX from the 26th June using 1 hour candles.
You can see in this period that we have had (3) clear TMA triple moving average system crossovers… there are another 2 crossovers that were not so clear [1 and 3] that resulted in break evens or very small losses.
So in all, this chart shows over 400 points profit in just over a couple of weeks trading.
In Depth Details and Avoiding Pitfalls
It’s a bit hard to see[I’ll zoom in a moment], but if you look very closely at our DAX chart you will see that there have been occasions when the price has spiked in one direction or another.
It is these spikes that can cause the biggest challenge to traders… especially newbies.
If you were watching your position during these periods it is then that the panic button normally gets activated or if you are using stop that they will get triggered.
But in hindsight, looking at the chart, it seems obvious that there was actually no point in being alarmed.
In each of the cases where we have had a big spike in price, the price has come back to a level where it has then stabilised and continued on its trend.
The reasons that these spikes occur is this… WE ARE TRADING.
I couldn’t tell you why these sharp price swings happen… reaction to news, a terrible drought in some part of the world, unemployment figures, better than expected harvest… the lists of reasons go on and on.
All I know is that it is rare that you will get caught out in a storm in your bikini if you are trend trading and using moving average crossovers.
Because a candle moves 50 points in the wrong direction when you are in a trade, it doesn’t signal the next stock market crash.
Understand that this is not science… mistakes, losses and corrections happen when you are trading.
A major stock market crash or capitulation has not occurred in any 1-hour candle to my knowledge. These events take weeks and months to materialise. Try and take a back seat and chill out when you are trading… whatever you are thinking is probably not going to happen.
The 50 Period EMA… Your Emergency Stop Loss
Keeping your emotions in check when trading is as big [if not bigger] than any component of trading. Fortunately, this is where the triple moving average system can really help you out.
Golden Rule: You do need need to close your trade unless the price [candle] closes above or beneath the 50 EMA… even if the price goes shooting of in one direction or another during the formation of a candle… hold tight and see it out. If you’re not watching your screen then you’ll be none the wiser anyway.
As explained previously, instead of using stop losses on your account and seeing them being constantly hit and then seeing the price coming back to happily move on in the right direction [as if it has done it on purpose to tease you and only you personally]… just use the 50 EMA as your emergency stop loss guide if need be. Use the 10/20 EMA crossovers to close out and take profits on a winning trade.
A Quick Example of Trading Psychology
The money is in the waiting… I’ve told you that many times before.
Opening your trade and then walking away is a great strategy to increase profits in most cases.
It’s far easier said than done for most though. But once you do manage to do it, and you are confident enough to leave your PC or device, you really can be cooking with gas.
What’s in Your Head?
Let’s zoom right in and have a look at what goes on during trading one of our triple moving average system crossovers. We are going to analyse what a new trader might think if they were looking at the chart as the price unfolds. We can then compare it to how a more seasoned trader enters and then trades the market.
- After entering our trade at some stage after the crossovers the price moves steadily up.
- All of a sudden at around 9am the price starts moving down for no apparent reason when the trend is clearly up. OMG.
- At 2pm it is clear that this is a crash, the trader takes a loss, closes out their position and is left shaking with relief. The price then moves back up and the trend continues.
- The trader is then left scratching their… um, head or probably something else in wonder and enters the market again. At 4pm, the price falls back slightly again but the trader has already just seen this. They stay in the market overnight… although they don’t sleep well.
- At 8am the following morning the price shoots out and up into the stratosphere… I knew I was right! But in the blink of an eye the prices crashes back down along with the traders’ confidence.
- The next hour the price moves down even more… there’s going to be a crossover… I’m out of this… relief sets in again and the feeling of loss that the trader should have taken profits at the peak of the 8am candle… what’s more, in shock, the trader watches the price climb up again.
- The trader enters the market again. The market goes sideways.
Sound familiar to any of you?
The Experienced Trader
Now let’s see what a more experienced trader does.
They enter the market knowingly at a convenient time after the triple moving averages system gives the signal.
They set an alert that is emailed to them and also arrives on their mobile if the price closes beneath the 50 EMA if they are long or above the 50 EMA if they are short.
They then walk away in confidence.
If there is no alert, then all is good. They go to the gym, have coffee and walk their dog… all whilst as calm as a Hindu cow. Life’s good.
You Don’t Need to Watch the Screen all Day
Can you see how trading can be as easy or as hard as you make it?
You don’t need to be watching your positions all day. Doing so is just stressful and pointless. It also makes you do unnecessary things that are not part of your strategy.
Even if you’re not using stops like I explained earlier, you can still leave your trades to do their thing. In fact, Vince Stanzione believes that spread betting companies offer stops to their customers to maximize losing trades. He’s got a really good point if you think about it.
Trading stocks with the Triple Moving Average System
Here are some more examples of the system trading individual stocks.
In the above Mastercard chart you can see that there were a couple of false signals 1 and 2 and then a better move on the third 3. Another breakeven or small loss on the 4th 4 and then a good move on the 5th 5 signal.
The chart above is from Starbucks. This 30 minute charts TMA gave us a stress free 350+ points profit in around 10 days. You will be hard pushed to find an easier trading strategy than the triple moving average system.
In the above Microsoft 1-hour chart you can see that there was a couple of false signals from the 15th May. After this we get a nice signal on the 22nd that takes us right up to the 11th June. The result… over 250 points profit.
Using Daily Charts
You can also trade the daily charts using the triple moving average system.
Depending on your bank size of course and the actual stock in question.
The 50 period EMA is about the shortest of periods you can use when you get onto the daily charts though.
Day Trading Using a Triple Moving Average System
You can easily convert a triple moving average to a day trading system by simply reducing the time frame of the candles [price]
If you look at this chart of the German 30 DAX you can see that I have set the candles to 5 minutes. I am still using the same triple moving average values though.
As with any form of day trading, you are going to get far more signals and false signals at that, each day when using 5 minute charts. However, you can use some of the other indictors that are available on the chart to clarify taking a position.
Here you can see that I have added what is called an awesome oscillator. You could use this to validate your triple moving average crossovers. Although it isn’t going to keep you out of a sideways moving market it can be useful.
The TMA Crossover Setup Visually Explained
The actual crossover setup of the triple moving average system can sometimes cause a little confusion. Although it needn’t do.
The first TMA on the chart beneath is what you can consider a perfectly formed triple moving average crossover.
And yes, you most certainly could have made profits trading that signal.
But the following triple moving average also made profits, even though the moving averages haven’t crossed over in such unison.
They [the moving averages] do not need to look like they have been drawn on by an artist and fan out like a peacocks’ tail. They just need to cross in and around the same time.
The important point to remember is that as long as the smallest moving average has crossed both the other moving averages and that the longest moving average [in our case 50] is clearly above or beneath the both the other 2 moving averages [ours being 10/20] then you are good to go.
Trading needn’t be more complicated than it has to be.
Many systems will have you believe that you need to be doing this that and the other so that you gain some sort of edge. This is rarely the correct approach.
Get use to riding the ups and downs of your triple moving average system or strategy and eventually the penny will drop.
By that I mean that you will gain faith in what you are doing and from there you can develop your skills as a trader.
More importantly you will start to develop a sound mental game too.
Also think carefully about the use of stops. 9 out of 10 times you will be better of just trading to the moving average crossovers signals.
- Set a triple EMA using the periods 10,20,50
- Open the trade when all moving averages cross and make sure that the longest moving average is clearly above or below the 10 and 20 EMA.
- Close trade and take profits if the 10,20 crossover again or if the candle/price closes above the 50 EMA.
- Trade to the crossover signals rather than using stops if possible.
- Accept that you can’t and won’t ever win them all.
- Don’t panic. The price may move like what seems drastically at times… this isn’t a stock market crash. Keep calm, it’s unlikely you’ll lose more than 50 points or so as long as you are trading within your means.
- Remember that your winners will more than cover losses over time.