Introduction
The moving average indicator is one of the simplest and most useful technical indicators available to traders, and although you can use a single period moving average to identify the underlying trend, it is even more useful when you use a combination of moving averages.
That’s because when a shorter-term moving average crosses above a longer-term moving average, this signals the start of a new upward trend, and the opposite is true when the shorter-term moving average crosses below the longer-term moving average.
The problem that many traders have is knowing which variation of the moving average that they should use first of all, and secondly which combination gives the best and most reliable signals.
So in this article I want to try to answer both of these questions.
Which Moving Average to Use
If you read this comprehensive guide to moving averages, you can read all about the main ones that many traders like to use, such as the simple, exponential, weighted and triple moving average, and can learn about the key benefits of each one.
In the summary of this article, I pointed out that the triple moving average is arguably the best one to use because it is the quickest to react to market volatility, but explained why the exponential moving average still has the edge because it is used by so many other traders and has been very profitable for me in the past.
Regardless of whether you use the shorter time frames or the longer time frames when trading forex, the crossovers of the exponential moving averages will often give excellent signals, and because they are used by many traders, they have a lot more impact and are more likely to become self-fulfilling when they occur, particularly on the longer time frames.
Best Moving Average Crossover Combination
Moving average crossovers help to identify new trends (and get you into a position close to the start of these new trends), and therefore they can be applied to all time frames with some degree of success.
However, many long-term traders pay close attention to the the 50 and 200-period exponential moving averages because the EMA (50) crossing below the EMA (200) is referred to as a death cross and gives a very bearish signal, while the EMA (50) crossing above the EMA (200) is referred to as a golden cross and is a seen as a strong bullish signal.
These events are hugely significant in the world of trading, and you will often hear them being mentioned on the various financial websites and news outlets whenever they occur on the major forex pairs, stock markets and commodities.
When they occur, you will often get a pull-back to the EMA (200) before a continuation of the new trend, so this is generally a good place to enter a position.
Apart from this common combination, another really good combination to use on all time frames is the 5 and 20-period exponential moving average, as shown in the 1-hour chart of the GBP/USD below:
I built a whole trading strategy around these two indicators (along with a few additional indicators), and had a lot of success with this strategy when the markets were a little more volatile than they are today.
The key here is to identify the longer term trend on the longer time frames, and then wait for the EMA (5) to cross above or below the EMA (20) in the same direction as this trend on one of the shorter time frames.
So for instance, if a forex pair is in a clear upward trend on the daily chart, you would wait for opportunities to go long when the EMA (5) crosses above the EMA (20) on the 4-hour chart.
Alternatively, you could identify the trend on the 1-hour chart and then wait for the EMA (5) to cross above or below the EMA (20) in the same direction on the 15-minute chart, for example.
Final Thoughts
It is worth mentioning that no moving average crossover combinations will be profitable 100% of the time. You will always get false crossovers regardless of which type of moving average you use, and which time frame you prefer to trade.
However the 5 and 20 combination is one of the most reliable and flexible combinations because it works fairly well on many different time frames, while the 50 and 200 combination is a tried and tested combination on the daily time frame in particular, and is well worth paying attention to.
So is it right to enter trade on the second candlestick immediately after the cross-over or i have to wait for more indicators?
hi Butterman, you can do this cause it seems to be more safe.. but the markets often play another game. I prefer to entry as soon the faster crosses the slower EMA.
This is more a few risky but for me with good success.
Greetings from the margarine man !