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If you’re looking for a moving average strategy then this post is what you’re looking for.

To be a successful forex trader and make consistent profits for the long-term, you need to have a solid trading strategy (and of course the correct money management to go with that strategy).

You don’t necessarily need to have just one trading strategy. Personally I have a few different trading strategies that I use, like divergence trading fore example.

Another popular trading strategy I like to use is called a moving average trading strategy.

What Is A Moving Average Strategy?

A moving average trading strategy is a forex trading strategy where you take positions based on moving averages.

A moving average, or rolling average, is a technical indicator used in forex trading to smooth out price fluctuations. For example, a 21 period moving average is at every point on the chart the average of the last 21 period of that timeframe. So on a 1 hour chart a 21 MA is the average of the last 21 hours, but on a daily chart a 21 MA is the average of the last 21 days.

There are many variations to a moving average trading strategy and you can literally tweak it as much as you want until you find a perfect system for your market and your trading style. You’re about to learn the moving average strategy that I personally use and that I’ve had good success with to date, but first I need to explain about two different types of moving averages.

Simple Moving Average Strategy

The majority of forex traders use what is called a simple moving average. This moving average is simply the average of the period, placing equal weight (importance) on every period.

For example, a 21 SMA (simple moving average) on a daily chart is at any point the exact average of the last 21 days of trading, and every day counts equally towards that average.

Exponential Moving Average Strategy

I personally like to use what is called an exponential moving average. This moving average is different to a simple moving average because it places more weight (importance) on the recent parts of the period compared to the initial parts.

For example, a 21 MAE (exponential moving average) on a daily chart will not use each of the previous 21 days as equal factors to determine the average. It will place a higher value on the most recent 10 days, which I feel gives the moving average more accuracy.

For your moving average strategy it’s not really important to know exactly how these moving averages work. All you need to do is find a moving average or combination of moving averages that allow you to make a trading plan that suits your trading style.

A Profitable Moving Average Strategy

I’m going to reveal my own moving average strategy that you can use to make money from the forex markets.

For my moving average strategy I use exponential moving averages, a 21 MAE (blue), a 50 MAE (green) and a 100 MAE (pink).

There are a few ways to find entry points for profitable forex based on this moving average strategy but there are a few things you should be aware of. Just like any forex trading strategy, a moving average strategy is not going to work every single time. There will be false signals from time to time, which is why you should always trade according to proper money management rules (small risk and always using a stop loss).

I’m going to explain my moving average strategy with the help of two charts (click on them for a larger view).

My moving average strategy works on all time-frames, but personally I like to use it on 1-hourly, 4 -hourly and daily time frames.

The above chart is a 4 hour chart of Eur/Usd, with a 21 MAE (blue), 50 MAE (green) and 100 MAE (pink).

Moving Average Strategy 1

The first way of finding an entry point based on my moving average setup is by going long when the 21 MAE crosses upwards through the 100 MAE.

This is indicated on the chart above with the red vertical lines, and there are only 2 crosses on this 4 hour chart of Eur/Usd over a period of around 4 months. A trade based on this would require you to hold your position for days or weeks and would result in big profit.

The only thing to be aware of with the moving average cross is that during periods of sideways price action, this strategy is not very effective. During sideways price action the moving averages all come together and sometimes cross multiple times without giving big moves in either direction.

Moving Average Strategy 2

Another moving average strategy based on my above setup would be to take a long position when the price action goes above the 100MAE and a short position when the price action goes below the 100MAE, as indicated on the chart above by the blue vertical lines.

Once again, on the 4 hour chart of Eur/Usd there are only two entry points based on this moving average strategy. If you would follow this strategy you’d need to do some more tweaking and perhaps move to a 110MAE to prevent getting false signals where the price action only pokes its head through the 100MAE without following through.

Moving Average Strategy 3

A third moving average strategy would be to take positions against the direction of the trend when the price action touches the 100MAE.

As you can see on the chart above, price action has a tendency to always come back to the 100MAE when its been too extended, but then usually continues its trend.

In other words, for example let’s say the trend is upwards, but the price action extends too far from the 100MAE so it pulls back to the 100MAE in the form of a correction. At the point where this correction touches the 100MAE, you could take a long position with a relatively short stop-loss level with the expectation that the 100MAE will serve as support and the price action will resume its upward trend.

In the chart above you can see 6 examples of where this occurs.

Please be aware that this moving average strategy will not work every time because there are times when the price action will move through the 100MAE and not bounce from it like this strategy expects. That is why you need to trade with a stop-loss so that if the price action moves through the 100MAE that you only face a small loss and can try again next time.

For some further examples of moving average trading I’ve also included a daily chart of the Eur/Usd above (click for a larger view).

Out of all the moving average strategies listed in this post, the most effective and easiest moving average strategy to follow is to buy when the 21MAE crosses upwards through the 100MAE and to sell when the 21MA crosses down through the 100MAE EXCEPT when these crosses occur during periods of consolidation (sideways price action).

FILED UNDER: MOVING AVERAGE STRATEGY