Most people have traded with moving averages. They end up being frustrated and losing money. That’s because they’re not using them correctly. I’m going to show you how to use moving averages the right way.
Where it works and where it doesn’t
To get good trades using moving averages, there’s just 1 thing to do. The thing you need to do is move to a higher timeframe. Stick to 1H, 4H and Daily charts. Sounds simple, right?
It is simple but extremely effective. When this strategy is used on higher timeframes, it works amazingly. But on lower timeframes, you end up getting a lot of false signals.
Also, use this strategy for potential reversals and trend continuation entries. Avoid using them in a sideways market. (I’ll talk about how to avoid a sideways market)
Remember, the higher the time frame is, the better and more reliable the signal is.
MA pairings
These are the best MA pairings you can use:
- 13 EMA & 21 SMA
- 5 & 20 SMA
- 10 & 50 SMA
The big secret
Now, after using the moving averages to trade, you will still get fake outs. You will still get caught in sideways markets. But there is a way to make the signals extremely reliable and filter out false signals. You can use the Death cross and the Golden cross.
A Death cross is used for a sell. It happens when the longer period MA is ALREADY sloping downward and the shorter period MA crosses below it. Example:
A Golden cross is used for a buy. It happens when the longer period MA is ALREADY sloping upward and the shorter period MA crosses above it. Example:
These are used to avoid sideways markets.
Summary
This strategy is supposed to be used on high timeframes like the 4H and Daily chart.
Rules for a buy:
- The shorter period MA crosses above the longer period MA
- The longer period MA should be either flat or already be sloping up (this is important)
- Never take a buy if the longer period MA is sloping downward
Rules for a sell:
- The shorter period MA crosses below the longer period MA
- The longer period MA should be either flat or already be sloping down (this is important)
- Never take a sell if the longer period MA is sloping upward
Please do not use this on lower timeframes like 1M, 5M, 15M and 1H.
I hope you got value from this!
Where it works and where it doesn’t
To get good trades using moving averages, there’s just 1 thing to do. The thing you need to do is move to a higher timeframe. Stick to 1H, 4H and Daily charts. Sounds simple, right?
It is simple but extremely effective. When this strategy is used on higher timeframes, it works amazingly. But on lower timeframes, you end up getting a lot of false signals.
Also, use this strategy for potential reversals and trend continuation entries. Avoid using them in a sideways market. (I’ll talk about how to avoid a sideways market)
Remember, the higher the time frame is, the better and more reliable the signal is.
MA pairings
These are the best MA pairings you can use:
- 13 EMA & 21 SMA
- 5 & 20 SMA
- 10 & 50 SMA
The big secret
Now, after using the moving averages to trade, you will still get fake outs. You will still get caught in sideways markets. But there is a way to make the signals extremely reliable and filter out false signals. You can use the Death cross and the Golden cross.
A Death cross is used for a sell. It happens when the longer period MA is ALREADY sloping downward and the shorter period MA crosses below it. Example:
A Golden cross is used for a buy. It happens when the longer period MA is ALREADY sloping upward and the shorter period MA crosses above it. Example:
These are used to avoid sideways markets.
Summary
This strategy is supposed to be used on high timeframes like the 4H and Daily chart.
Rules for a buy:
- The shorter period MA crosses above the longer period MA
- The longer period MA should be either flat or already be sloping up (this is important)
- Never take a buy if the longer period MA is sloping downward
Rules for a sell:
- The shorter period MA crosses below the longer period MA
- The longer period MA should be either flat or already be sloping down (this is important)
- Never take a sell if the longer period MA is sloping upward
Please do not use this on lower timeframes like 1M, 5M, 15M and 1H.
I hope you got value from this!
👉 For the MA period
- For intraday trading and scalping, shorter periods around 10 and 20 are recommended.
- EMAs give more weight to recent prices and are sensitive to prices, making them suitable for scalping and day trading.
- For higher timeframe entries, 50 & 100 EMA and the 50 & 200 EMA can be used for longer & bigger trades.
- Please also keep in mind that the periods don't matter because they don’t make much of a difference. Don't be too concerned about the period of the MA.
👉 Where to use the Golden and Death cross
- The Golden and Death cross will still fail in a few cases.
- Remember, no indicator or moving average system can ever replace proper price analysis.
- Have a good price analysis by using Elliot Waves or Smart Money concepts or anything else to understand the context of the market. Use that with this moving average system.
- Using this moving average system in context of the market will help you avoid sideway markets.
👉 Why the Golden & Death cross work
- The Golden cross and the Death cross are extremely reliable. Why? Let’s say you’re looking for a buy.
- You’re looking for the larger MA to slope upwards and the shorter MA to cross above it (to find a Golden cross). If the larger ma is sloping up, that means that there’s a lot of buying power. There has to be a lot of prices going up to make the large MA go up too.
- It is difficult to get a large MA to move up. So, If the large ma moves up, you can be sure that the trend is up. This opposite of this logic can be applied for a sell.
- The Golden cross and the Death cross will get you out of most sideway markets. You will still get stuck in some of them but most of the time, your trades will be in trending markets.
👉 Another trick (as important as the Death & Golden cross)
- Your goal, as a trader, is to stack as much evidence as possible in your favor. It will help you know that you’re on the right side of the market. This trick will help you do that.
- This trick can be applied to every MA cross (not just the Golden & Death cross).
- For a buy: wait for the price to find support at a moving average line. Price should go down to an MA line. Then wait for price to break above the latest swing high. This will act as a confirmation that price is going up.
- For a sell: wait for price to find resistance at a moving average line. Price should go up to an MA line. Then wait for price to break below the latest swing low. This will act as a confirmation that price is going down.
- Using this will make a significant difference in your trading. Combine this with the Death and Golden cross to get better results.
- This and the Death & Golden cross can be used to catch continuations of existing trends and trend reversals.
👉 Where to place your Stoploss
- Place your Stoplosses at structural points in price. Don’t just place them anywhere. Place them near the 2 previous relative swing lows/highs.
👉 1 last tip
- When the market moves abruptly and somewhat in a straight line, it forces both the MAs to form a Death or Golden cross. Avoid taking those signals because the market will return back to the mean and go in the opposite direction of the cross. The reason that price moved abruptly might’ve been because of an event which is short lived and not a trend which you can benefit from.
Please backtest this strategy and see how it performed on historical data. I hope you found this helpful!