Moving Average Crossover Strategy
The moving average strategy is one of the most widely used technical tools on the MetaTrader platform, thanks to its strength and the many jobs it does. In today’s article we’ll walk through a forex strategy built mainly around moving averages, one that stands out for how simple it is.
The Moving Average Forex Strategy
What the strategy needs
As the title says, and as we mentioned in the intro, today’s strategy relies heavily on moving averages, because we’ll be using two of them:
- The exponential moving average EMA 20
- The exponential moving average EMA 50
Along with the MACD indicator, which helps a lot in measuring the strength of the trend and, in turn, picking out the best and strongest setups.
Timeframe used
You can use this strategy on smaller timeframes, starting from the 15-minute chart up to the 1-hour chart. In this walkthrough we’ll focus mostly on the 15-minute timeframe.
How to trade the moving average forex strategy, step by step
Now we come to the most important part: explaining the strategy. To make it easier to follow, we’ll break it into steps so it’s simpler to understand. Follow along with these steps:
1- Set up the chart
Our first step is setting up the chart by adding the indicators we mentioned above — the 50 moving average, the 20 moving average, and the MACD indicator. Look at the image below.
2- Wait for price to cross above the moving averages
After adding the tools we’ll use, the indicators mentioned above, we come to another important part of the strategy: price crossing the moving averages, which usually points to a change in the current direction of price. What we need here is for price to cut through both averages, not just one, since that is a stronger confirmation than crossing a single average. Look at the image below.
In the image above you’ll notice a crossover happened between price and the moving averages, and also a crossover between the moving averages themselves.
3- Confirm the MACD has turned positive
This step is no less important than the one before it, since a positive MACD reading sharply increases the chances of price rising. In the next image, you’ll notice the MACD moved its reading from below the zero line to above it (from negative to positive).
Read also: MACD indicator explained.
4- Wait for the retest
After the change of direction is confirmed, don’t rush into a buy trade. Show a little patience — we need one more confirmation, which is a retest of the moving averages, as shown below.
5- Buy signal
Once the previous conditions are met, our strategy is complete and you can now enter the buy trade. We’ll do that as soon as a candle opens and closes above the moving averages following the retest.
6- Set the stop loss and take profit
The stop loss will of course sit below the lowest low that price reached, as shown on the chart below.
In the image above you’ll notice we set the stop loss at the lowest low price reached, and you’ll also see that price moved very well and climbed higher.
For take profit, you can act as soon as a crossover happens between the indicators and price to the downside. But this way we can give back a lot of points, so we’ll watch momentum through the MACD to check these signals are valid, and then decide whether to close part of the position or close it fully.
In the image above we notice the positive momentum (the positive signals) on the MACD is fading, so it’s better to close the position fully and settle for the points the trade has already made.
Finally, a forex trading strategy is a technique a forex trader uses to decide whether to buy or sell a currency pair at any given moment.
Forex trading strategies can be based on technical analysis or on news-driven fundamental events. A trader’s currency trading strategy usually consists of trading signals that trigger buy or sell decisions. Forex trading strategies are readily available on trading websites, or traders can build their own.
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Frequently asked questions
What are the best trading strategies?
The best trading strategies differ from one person to another. It’s usually better to develop your own strategy, one that contains three core elements: price action analysis, momentum analysis, and Japanese candlestick signals.
What are forex strategies?
They are the method or approach a trader follows to try to make a profit in the market, such as using technical indicators or chart patterns to analyze price movement and relying on certain patterns for entries and exits.
What is the difference between the simple moving average and the exponential moving average?
The main difference between the simple moving average and the exponential moving average is sensitivity: the exponential average is less sensitive and lags less behind price movement, in contrast to the simple average.
Risk & disclosure. This article is educational only and is not investment advice. Trading forex and CFDs uses leverage and carries a high risk of losing money quickly; you can lose more than your initial deposit. Chart patterns and indicator signals such as moving average crossovers and the MACD can fail, and past behavior does not predict future results. Do your own research and only trade with money you can afford to lose. Some links on this site may be affiliate links.
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