MA Crossings Trading Strategy

Forex Maniac > Trading Strategies > MA Crossings Trading Strategy

Straightforward and popular trend following strategy, based on the crossing of two Moving Averages.

Strategy

The basic rule is pretty simple: Open Buy when Fast Moving Average crosses Slow Moving Average from below; Open Sell, when Fast Moving Average crosses Slow Moving Average from above.  Exit rules may vary depending on the trading style and risk tolerance of the trader.

Setup

  • Any trading instrument is suitable
  • To avoid influence of market noises we recommend to use time frames higher than 30 min
  • Add Fast Moving Average (further FMA) to the chart. Period from 6 to 14 is considered to be fast
  • Add Slow Moving Average (further SMA) to the chart. Period from 28 to 96 is deemed to be slow
  • There are four common types of Moving Averages: Simple MA, Exponential MA, Smoothed MA, Linear Weighted. We recommend to use Exponential MA, as it is more sensitive to latest price movements, so has less lag.

Entry rules

  • Price higher than SMA and FMA crosses SMA from the bottom up – open Long position (Buy)
  • Price lower than SMA and FMA crosses SMA from the top to bottom – open Short position (Sell)

Exit rules

Unlike the strict entry rules, exit rules can vary depending on the risk tolerance and money management of the trader. At first, the trader has to consider Take Profit(TP) and Stop Loss for every trade. Many traders do not use Take Profit, or set it to higher levels, counting on closing the trade by exit rules thereby maximizing profit. However, one should never forget about reasonable Stop Loss(SL), which will reflect the maximum risk that you can take for the trade.

Stop Loss

Determine the maximum SL level regarding the money management strategy (For example, the trader cannot risk more than 5% of deposit per trade). Stop loss for the trade has to be within the maximal SL level. Rules for determining SL (rules are listed for the Buy signal, for the Sell signal rules are mirror opposite):

  • Minimum of current trading day
  • Closest lower Pivot Point
  • Minimum of the last bar (Suitable for the high time frames, 4h, 1D, 1W)

Take Profit

Usually, Take Profit set regarding SL. For this strategy, we recommend making TP twice as SL size. Also, we could use similar rules to SL calculation (rules are for the Buy signal):

  • Last Pick (Visual Pick of the price for the reasonable period)
  • Closest upper Pivot Point
  • Maximum of the last bar (Suitable for the high time frames, 4h, 1D, 1W)

Early exit rules

  • Trailing stop. The size of the trailing stop depends on the timeframe and amplitude of the market noise. Reasonable trailing stops for different timeframes of the EURUSD: 30m – 20 points; 1H – 30 points; 4H – 80 points; 1D – 80 points; 1W – 300 points;
  • Low-risk rule: when price crosses FMA – close the trade. Will not allow to catch big movements.
  • High-risk rule: when FMA crosses SMA from the top to bottom – close the trade. Suitable for trailing big movements.

Examples

MA Crossings 1

We see that FMA (Red Moving Average line) crosses SMA (Blue Moving Average line) upwards in the left lower part of the screenshot, we consider it as a Buy signal. On this screenshot, we see Take Profit (red horizontal line) set by the “Last Pick” rule. Also, we see possible exit points: Low-risk exit, where price crosses FMA, and High-risk exit, where FMA crosses SMA. Such situation is ideal for MA crossings strategy.

MA Crossings 2

On this screenshot, we see the same situation, only from a higher perspective. Here we see two possible TP and SL levels.

Pros

Easy and clear strategy for beginners. Suitable for big movements, therefore has big profit potential.

Cons

A large number of false signals during low volatile, flat periods. Thus, such strategy alone is not suitable for automated trading.

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