Learn to apply moving average trading strategy

By Admiral Markets

Dear Traders,

Welcome to the second part of my coverage on moving averages (MA).

Part 1 gave you the basics of Forex moving averages, while this post is focused on teaching you how to apply MA’s for analytic and trading purposes.

So, if you want to know specifics like how to apply the angle of an MA or how to avoid the danger of overlapping MA’s – read on.

MA angle reveals key info

The angle of a Forex moving average, is an important indication of momentum or lack of it.

For example, a steeply angled moving average confirms strong momentum.

But when the angle of the moving average is choppy, flat or shallow – it indicates a corrective market phase.

What kind of angle is steep or shallow?

The best rule-of-thumb is to imagine the hands of a clock, whereby the MA is considered:

1. flat when the MA direction is between 2 and 4
2. trending when MA direction is between 4 and 5 (bearish) or 1 and 2 (bullish)
3. impulsive when the MA direction is between 5 and 6 (bearish) or 12 and 1 (bullish).

The angle of moving averages:

…together with candlestick close and patterns…

…helps identify sustainable and false breakouts in the Forex market.

It also indicates when the momentum might be losing its pace or reversing in the opposite direction, which occurs when:

1. the degree of the angle changes, or
2. the angle itself switches (from bearish to bullish or vice versa).

I use a special Forex moving average indicator that automatically changes the colour of the MA line, when the angle switches from bearish to bullish or from bullish to bearish.

If you would like this indicator too, please send us the following message:

“Hi. Please ask Chris Svorcik to send me the special MA indicator that changes colour.”

Overlapping moving averages indicate danger

Momentum and trends will last for a while, but the market will eventually build a sizeable correction.

You can recognize when a consolidation starts, by analysing price and moving averages:

…momentum is strongest when price is not hitting the MA’s and the MA’s are not hitting each other…

…while consolidation is present when the MA’s are on top of each other and the angle of the MA’s are generally flat or start to flatten out.

During a consolidation zone, price does not tend to use the moving averages as support or resistance – but rather as a move back to the mean.

In fact, price will use the moving average as a mid-point while it oscillates above and below it.

Maybe you already knew this?

If not, here’s two more things you probably don’t know and should remember.

1. In consolidation zones, price is not quick enough to pull away from the mean and the MA becomes a gravitational pull on price
2. In trends, price has sufficient pace and the momentum is able to escape away from the MA’s, which in turn changes the role of the MA from a gravity pull towards a support or resistance level.

See this strategy video below, for more detailed information on how financial markets experience consistent battle between speed and gravity.

MA entry and crossover specifics

Moving average crossovers represent the first Forex strategy that beginning traders tend to learn when starting out.

The Forex moving average cross is used as an entry system, but unfortunately for many newbies – it often leads to disappointment.

This is because the entry faces too many whipsaws, as the MA crosses and recrosses during a consolidation zone.

The whipsaws will eat away any of the profits made during trend periods and sink the trading account into a loss when the market consolidates.

And be aware:

…the market loves to build long corrections.

If you are looking to enter the market with moving averages, it is better to:

1. wait for price and 2 MA’s of different length (like 21 and 144 MA close) to be aligned on i.e. 1 hour chart
2. zoom in to a lower time frame like the 15min chart
3. trade the continuation breakout past the 21 MA’s
4. stay in the trade as long as the 8 MA close is confirming momentum, but consider tightening a trail Stop Loss or closing the trade when the 8 MA turns into the opposite direction of the open trade.

Following the above steps means you have waited for a trend, pullback and first continuation – instead of a random entry on a cross.

Moving averages are rock solid

Forex moving averages offer a long list of advantages like:

1. determining presence or lack of a trend
2. indicating trend direction
3. showing strength of momentum (or lack of it)
4. offering valuable support and resistance
5. providing opportunities for trend trades
6. being used for a move back to mean, when a large range is visible
7. offering the ability to find ranges
8. providing targets for reversals and divergence.

So I hope you’ll enjoy using MAs as much as I do.

That’s it for my posts on this subject, but feel free to leave any feedback or questions in the comments section and I will get back to you as soon as I can.

And finally, If you are interested in getting my MA that changes colour according to its angle – just send a message and I’ll get it to you.

Cheers and safe trading,

Chris

Article by Admiral Markets

Source: Learn to apply moving average trading strategy

---

Admiral Markets is a leading online provider, offering trading with Forex and CFDs on stocks, indices, precious metals and energy.