What is a simple forex strategy to use?
One of the most common indicator used in trading is the moving average.
What is it and does it work?
Let’s find out.
There are many types of moving averages to use. Simple, exponential, smoothed, linear weighted.
We will start off by using the simple moving average (SMA) for explanation.
What is a Simple Moving Average?
A 5 period moving average is the average of the close prices for past 5 period. You may also use the highs and lows to calculate the moving average, but more commonly, the closing prices are used.
Period is the time frame. If the closing price for the past 5 hours are C1, C2, C3, C4, C5. The 5 hour moving average will be (C1+C2+C3+C4+C5) / 5. That a value that will be plotted on the graph as seen below:
As points are plotted, they join and form a curve line on the chart. The blue line is the 5 hour moving average. The yellow line is the 20 hour moving average.
The blue line is the faster moving average as it reacts faster to the latest changes in prices. The yellow line is known as the slower moving average.
Moving Average Crossover Strategy
Now that you know what is a moving average. Let me show you how you can use it in trading.
When the blue line (faster) moving average crosses the yellow line (slower), it shows that the prices is trending up. You can enter the trade, placing a buy order. When the faster moving average crosses back below the slower moving average, its time to exit.
Alternatively, you can play it the opposite direction. Sell when the faster moving average crosses below the slower moving average. And sell when the faster moving average crosses back above the slower moving average.
What is the Double Moving Average Strategy?
Double Moving Average Strategy is when you buy when a short period moving average crosses above the longer period moving average.
Have you ever wanted to see if a forex strategy works?
You do not have the time to test it?
Some people would show you a forex strategy and shows that it works or do not work based on a small date range. With a small set of data it is almost impossible to tell if a strategy do work or not.
In this analysis we are doing it differently. By making use of forex robots to do run the testing, we can quickly see the results for the whole 2018 year.
We will be testing the Double Moving Average Crossover Strategy. The Simple moving average (SMA) is used.
EUR / USD
Date tested on:
1 Jan 2018 – 31 Dec 2018
M5, M15, H1
Simple Moving Average Crossover Values:
5 SMA and 20 SMA
20 SMA and 50 SMA
5 SMA and 20 SMA
In the 5 min chart, the moving average crossover strategy works at times. After the whole year, the balance remains about the same as the start.
In the 15 min chart, there are win and loses, that kind of even out. There was a huge decrease around the middle, which causes the overall lost for the year.
For the 1 hour chart, we see that there are periods of profit. But the lost was more than the profit. Overall, it is a lost as well.
20 SMA and 50 SMA
The tests on 20 cross 50 moving average shows similar results as the 5 cross 20 moving average. From these few tests, the moving average using these values is not a profitable strategy for the year 2018 on the EUR/USD.
lf you wish to run test with other values or timeframes, you may make a request to us to run test on that. Alternatively, if you like to run these test on your own, you can also get this free Forex Robot here.
Another popular moving average to know about is the Exponential Moving Average (EMA).
EMA vs SMA – The Differences (Testing using Robots)
Simple Moving Average (SMA) takes equal importance of the data for the time period. For example, for a 20-period MA, the importance of the 5 day value is the same as the 15 day value. As the calculation is the average of the sum of closing price for the past 20 days.
However, Exponential Moving Average (EMA) takes the more recent data of higher importance. Using the same example as above, the 5 day value has higher importance than the 15 day value as it is more recent.
The exact calculations for the EMA will not be discussed here. It is more complex, and most of the time, your trading software will draw the EMA line and no calculations is required.
Let us look at a scenario below:
We will use the 5 SMA and the 20 SMA, and compare this to the 5 EMA and the 20 EMA.
Yellow: 20 SMA, Red: 20 EMA, Blue: 5 SMA, Purple: 5 EMA
We can see the slight difference in the SMA and EMA for the same time period.
The EMA reacts faster than SMA. The 5 EMA (Purple) crosses the 20 EMA (Red) before the 5 SMA (Blue) crosses the 20 SMA (Yellow).
Next let us find out the difference for exponential moving average (EMA) using robots.
We will test this using the Free Double Moving Average Crossover Robot.
5 SMA cross 20 SMA results for year 2018:
We see that the moving average strategy produces the trading result as above.
Next, let’s see if the EMA would be any different.
We follow the same as above, but instead of SMA we use the EMA. The 5 EMA cross 20 EMA results for year 2018:
The graph for the EMA is very similar to the SMA graph, with only a slight difference. The EMA graph is more smoothed than the SMA one.