MOVING AVERAGES
Moving Averages are a hugely popular indicator which smooth out price action, helping us determine the trend; breaks and changes in trend and levels of support and resistance.
​
I have highlighted the areas on the chart with a blue circle to show you why you would think about jumping in after the blue and red lines cross each other.
Strategy 1
The moving averages we use for strategy 1 are:
​
The smoothed moving average. SMA – Red 21
The exponential moving average. EMA- Blue 8
​
It’s important to know that moving averages are lagging indicators based on previous prices. We wait for them to cross before using them to build a trade setup. You shouldn’t use moving averages alone as a single confluence but when used together with your other confluences it can help create a higher probability trade setup.
These moving average crossovers usually coincide nicely with a break in your trendline, this again helps to build a higher probability trade. We also use 3 other moving averages in strategy number 2 which we will discuss next.
Building confluences with Moving Averages
The more confluences you can add to your setup the better, for example below:
​
- double bottom
- MA crossover
-trendline break.
Strategy 2
Strategy 2 consists of using the 20EMA, 50EMA and the 200EMA. We treat all three moving averages in the same way; we trade off breaks and bounces of these moving levels of support and resistance. The 20EMA is used for the more intraday trading and used for the more aggressive trader.
The 50 EMA is the most popular moving average, used by intraday traders and Swing/position traders. In a strong Bull trend the 50 EMA will act an extra layer of support which traders will use as entries when price pulls back to this moving level. As you can see from the chart below the 50 EMA is the red line and whenever it got close to the red line it acted as support and was rejected from it. Remember that the moving averages are never an exact level, they indicate an area of interest. The 50EMA could also act as a layer of resistance in a bear trend providing excellent selling opportunities.
Trade setups with Moving Averages
Below we have a technically strong sell trade setup. We know that we are in a strong bear trend so short/sell trades are favoured. We also have break of structure in the form of a trend line break, along with rejection at the FIB 0.5 retracement level. Finally the rejection of the 50 EMA making this a high probability sell trade incorporating moving averages.
GBPUSD Trade example (Daily timeframe)
The 50 EMA works best in our opinion on pullbacks in a trending market. We would look at the positioning of the 50 EMA on the higher timeframes first to help work out the trend we are currently in. From here we would then drop down the timeframes to see how close price is to this moving average and look for potential setups.
​
The absolute lowest timeframe you should look at with the 50 EMA is the 1hour timeframe. The 1 hour, 4 hour and Daily timeframe work great for high probability entries, it just depends what style of trader you are as to which timeframes you focus on.
​
We can also use the 50 EMA as a signal for a change of trend. We usually see price break and retest the 50 EMA like it would to a trendline. After we see a situation like this we look to add other confluences to build a high probability trade setup. Again this can all be applied to the 200EMA, they work exactly the same.