Moving averages have historically been considered reliable indicators of trading spirits. Selecting the optimal “Fan of MA” will allow you to stably filter the trend market without the use of pulsed instruments (oscillators) - the mutual arrangement of the lines will show the direction of the transaction and the moment of the MA breakdown will be the entry point.
The “Fan of Moving Averages” uses the classic method of working out a trend at different periods and allows you to trade in the direction of the strongest trend.
We remind you: the indicator period is the number of bars on the calculated timeframe, that is, you need to immediately determine how long you are ready to keep the position open.
If you expect to close the deal within 1 hour, then MA (12) will be enough for M5 - it will show the average value for 60 minutes.
If you plan to keep the position for 1-2 weeks on the daily chart, then you need EMA (7) and EMA (14), but usually the periods of 5 and 10 are used - according to the number of trading days.
The trend needs to be monitored comprehensively: global, medium-term, and short-term. That is, for a sustainable strategy, you will need at least three moving averages.
For example, for the daily chart, MA (200) is a long-term trend (about one year), MA (50) is a medium-term trend (about 2-2.5 months), and MA (20) is a short-term trend (four trading weeks).
The long-term trend is considered more reliable: you must admit that the general opinion of 200 participants is a more representative sample than the opinion of 50 respondents.
Movings with periods from 200 and above are also called the investments since the location of the price above/below such lines shows the interest of large (institutional) players.
All MA characteristics have commercial value: general dynamics, direction, growth or fall rate. For example, the angle of the MA inclination shows whose trading "pressure" (buyers' or sellers') is stronger at the moment; the closer the MA to the horizontal position, the calmer the market (see Using Graphic Tools).
MAs are used as strong dynamic levels of support/resistance; therefore, in the area of such lines, most participants either enter the market or record the result of the transaction.
For large time periods, it is recommended to use exponential, for smaller ones - simple moving averages (see Using Indicators).
Practice shows that the price is much more difficult to break through from the bottom up through a declining MA than through a "growing" moving average.
By the way, the stock market with a few exceptions is a technically clean trend. For the curious, we offer a special ETF Replay service, where you can test the classic moving averages on the assets of the American stock market online.
Below is a test of the Dow Jones index (SPDR Dow Jones Industrial Average) from 2002 to the 10/11/2019.
There is also extended trade statistics for moving averages published there.
MAs work with any exchange price (open/close, max/min, weighted averages), but most often, they use the close price - as the most correct for historical analysis.
In the trading system, each of the moving averages is responsible for a separate trend. Below are a few general recommendations:
The most popular MA kits for individual timeframes:
The logic is simple: while the price is above average, buy transactions are a priority; if lower, we consider only sales.
In the “Fan of MA” methodology, trading is carried out strictly according to the trend and on pullbacks in the direction of the main movement; during flat periods, any MA-based trading strategy is stably unprofitable.
For a reliable entry, the relative position of the indicator lines (the correct order is from fast to slow) should correspond to the direction of the trend.
Entrance to the market is performed at the rollback of the fastest moving average. All signals are designed for a strong trend.
We’ll check several methods that (according to traders’ reviews) have established themselves as stably profitable. Scripts were created in Visual Strategy Builder, automatic tests were conducted in the Forex Tester environment over the past two years.
Settings: the spread is 2 points; the swaps are considered; the initial deposit is $ 100 000; the leverage is 1: 100 (for currency pairs) and 1:10 (for spot gold); the minimum transaction volume is 1 lot; trailing is by default.
Let’s take a closer look.
Conditions: EUR/USD on TF from H1 and above; 5 SMA indicators with periods of 90 (long-term trend), 60 and 30 (medium-term), 20 and 7 (short-term). Example entry point (see below):
We begin to search for trading signals only in the situation of the “right” Fan, that is:
Ignore delayed and incorrect signals.
We carry out a test with a trailing of 40 and a step of 20 points.
What is the result?
There is no drawdown below the initial balance at all, but 30 transactions in 2 years on H4 for the euro/dollar is not enough. Although the entry points are very reliable: the statistics are excellent, the equity line is almost perfect, the strategy does not respond to speculation and clearly fulfills the trend. Recommended for quiet, long-term trading.
Conditions: AUD/USD on H1 and above; indicators SMA (50) - the main trend, SMA (20) - medium-term, SMA (5) - short-term.
Terms for purchase:
For sale, you need the reverse circuit:
Ignore signals during the flat period and other problematic situations.
Test conditions and trailing parameters are similar.
What is the result?
AUD/USD is characterized by medium-term trend areas, and the strategy works them out perfectly. Statistics are weaker than in the previous test, but still stable.
TakeProfit/StopLoss parameters must be coordinated with the current volatility: for example, increasing the level of trailing from 40 to 60 points worsens the situation.
Given AUD’s strong fundamental connection with the Japanese yen and the situation in the Asian region as a whole, trading during news releases using this technique is not recommended. However, the strategy gives signals at such times.
About 2-3 transactions a week with a stable profit three times more than the loss will make this strategy a great addition to any trading system.
Conditions: Gold CFDs XAU/USD (different brokers may have different ticket names); timeframe H1; short moving SMA (24), medium SMA (120); long SMA (200).
We open a purchase if:
For the parameters of the trading asset and the conditions for the sale, see the screenshot below.
Trading assets involving gold are always actively volatile, so problematic situations arise quite often.
The test is conducted with a trailing of 200 points in increments of 50 on the author’s timeframe H1; it is assumed that no more than three transactions are constantly in operation.
What is the result?
For such a speculative asset, the strategy gave too few deals, especially on an hourly timeframe. The profit at the moment reached 170%, but at the end of the test, several unsuccessful transactions passed.
As a result, in two years it turned out less than 50% of the profit, that for gold is a rather weak result. The statistics are below the recommended values, which, in principle, is typical for spot assets with valuable metals.
Increasing the TakeProfit/StopLoss ratio is not recommended, as it increases the risk of loss.
Still, in our view, the strategy with the same parameters should give a more stable result on H4.
A successful history of moving average deals began with the first market trading - more than 100 years ago. It means that the logic of calculating the average value is consistent with market psychology.
It’s not worth thinking that we specially selected “supersuccessful” variants of the “Fan of MA” specifically for the test. However, any recommendations for choosing the optimal parameters - for individual assets or trading conditions - are gradually becoming obsolete.
All schemes must be tested in practice and it is better to do it yourself. We invite our readers to independently check another popular set of EMA (8) + EMA (12) + EMA (24) + EMA (72), called “harmonic”.
As you can see, backtesting is quite simple activity in case if you have the right backtesting tools.
The testing of this strategy was arranged in Forex Tester with the historical data that comes along with the program.
To check this (or any other) strategy’s performance you can download Forex Tester for free.
In addition, you will receive 19 years of free historical data (easily downloadable straight from the software).