Moving Average crossover Forex Strategy uses three different moving averages to obtain buy and sell signals. The three moving averages are used to reduce the wrong signals caused by the dual moving average crossover.
Why you used Moving Average Crossover?
The use of the moving averages of 3 different periods gives a very good idea of whether the Forex market trend has really changed or changed momentarily. In this case, the buy or sell signal is available at the beginning of the trend in the new market. The third moving average is combined with the two moving averages to confirm or reject the received signals. As a result, the chances of a trader making the wrong decision are greatly reduced.
Rules of 3 Moving Average Crossover system :
The shorter the period of the moving average, the more closely it will follow the price curve. When a stock starts to move in an uptrend in a market, the fast-moving averages (short-term) start to rise much earlier than the slow-moving averages. Suppose, in a market, the share price rises at the same rate for 60 consecutive days and then decreases at the same rate for the next 60 days. In this case, the 10-day moving average will continue to go down on the 6th day. And the 20-day and 30-day moving averages will start the process of going down on the 11th and 16th day respectively. Waiting a long time to trade shares in a market can lead to a large loss of capital gains. At the same time, if you enter a forex trading quickly, there is a possibility of losing by getting the wrong signal. Traders use the third average to eliminate this problem.
Forex traders can select periods based on different time-frames.
Exponential Moving Average (EMA) can be used for shorter time frames (hours/minutes) as it closely follows the price curve. For long time frames (daily / weekly) it is better to use Simple Moving Average. SMAs of different periods are seen depending on the characteristics of the share and the attitude of the user (5, 10, 15 or 4, 10, 50). For example, we will use 5 days, 10 days, and 15 days Simple Moving Average (SMA) to analyze the strategy.
Looking at point ‘A’ of the forex chart, it can be seen that all the 3 averages have come close to this point and changed direction. The red line in the figure is the fastest SMA (5 days), the green line is the medium speed SMA (10 days) and the purple line is the slow SMA (15 days). It acts as a sell signal when the fast SMAT crosses the medium speed and the slow SMAT 2 from the top down.
The signal can be further confirmed when the medium speed average crosses the slow average and goes down.
The crossover strongly demonstrates the legitimacy of changing trends in the market. Similarly, fast SMA acts as a buy signal when medium speed SMA and slow SMA cross from the bottom to the top. The signal can be further confirmed when the medium speed average crosses the slow average and rises to the top.
It should be noted that the system of triple moving average crossway provides a signal only when the slow moving average is above the medium speed average and the medium speed average is above the fast moving average. If the fast-moving average is above the medium-speed average, then the strategy sell does not provide a signal or the strategy loses its effectiveness. So triple moving averages like dual moving averages do not always give signals.
Aggressive forex traders– do not wait for trend confirmation. Rather they trade based on the crossover of the fast-moving average. Many forex traders also trade in a few steps, i.e., when the fast-moving average crosses the medium moving average, they buy some stocks, and then when the fast moving average crosses the slow moving average, they buy some more stocks. Then when the average speed crosses the slower average, they buy more.
Users can easily benefit from the Triple Moving Average crossover strategy in Forex.