Does Forex Moving Average Crossover Strategy Work?

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?

But..

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.

Currency:

EUR / USD

Date tested on:

1 Jan 2018  – 31 Dec 2018

Timeframes:

M5, M15, H1

Simple Moving Average Crossover Values:

5 SMA and 20 SMA

20 SMA and 50 SMA

Balance:

1,000 USD

Lotsize:

0.01

 

5 SMA and 20 SMA

M5:

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.

M15:

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.

H1:

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

M5:

M15:

H1:

 

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. 

Analysis:

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.

Does Forex Double Martingale Work?

forex casino double martingale

A Short History of Double Martingale

 

The Double Martingale Strategy has it origins from the casinos. Every time a player loses a bet, he doubles the bet until he wins. He only has to win once the cover all his losses.

Example: A player bets $1 and he loses, he then doubles his bet to $2 in hope to cover his $1 loss. At the same time gains a profit of $1 when he wins this round. If he loses the round, he continues to double his bet to $4. He continues to double to $8, $16, $32, as so on every time he loses a round.

If the player has unlimited amount of money, he would have a 100% winning rate. However, most players have limited amount of money. When a player faces too many consecutive losses, he will reach a point where he will not be able to double his bet. Eventually he will be faced with a huge loss or loses all his money.

In this short article, I will show you the 2 most popular ways how the Double Martingale Strategy can be applied to forex trading. Double Martingale Strategies can be used together with an existing strategy or it can also used by it own.

 

Double Martingale Strategy

 

Going Long

Trader enters a buy order and defines how many pips he intend to win.

Price Moves Up

Trader takes profit of the number of pips he intend to win.

Price Moves Down

The trader doubles the lotsize of the trade, hoping it will eventually go up and will make a profit.

When the price moves up and the profit for all the trades reaches the number of pips he intend to win. The trader will then close all trades for the profit.

Example

Trader buys 0.01 lots of EURUSD at 1.2220 and intends to have a profit of $1 USD. The PipValue of each pip (0.0001) is 0.1 USD for the EURUSD pair at 0.01 lots. To have a profit of $1 USD, the price has to move up by 10 pips (0.0010) to 1.2230.

We assume spread to be 0 for easier explanation of how this Double Martingale Strategy works. If price moves up to 1.2230, the trader would close the trade for the desired profit of $1.

However, if price moves to 1.2210, the trader would face a loss of $1 and closes the trade. He would then place another buy order at 1.2210 for 0.02 lots. Price would have to go up by 10 pips back to 1.2220 for him to win $2 and cover his original loss of $1.

If price continues to go down, he continues to double his lotsize in the similar fashion.

 

Going Short

The opposite is true for using Double Martingale strategy on short trades.

 

Double Martingale Strategy (Hedge)

 

The player can start by choosing whether he wants to place a buy or sell order.

In this Double Martingale Hedging Strategy, the trader would make a profit when the price moves in either direction!

Does this sound too good to be true?

Lets find out..

 

Going Long

Trader enters a buy order and defines how much pips he intend to win.

Price moves up

Trader closes with the profit intended.

Price moves down

Trader will close the buy trade for a loss. Next, he places a sell order right at the point of the close trade, hoping for the price to go down further. The lot size for the sell trade would be double the initial lotsize to cover the loss.

Price continues to go down, he will close the trade for the intended profit (trader is now in a sell trade). However if goes in the opposite direction, he will close the sell trade for a loss and double the lot size opening a buy order.

In other words, he alternates buy and sell orders every time he loses. This goes on till the trader wins, and one win will cover up all his losses.

Example

Trader buys 0.01 lots of EURUSD at 1.2220 and intends to have a profit of $1 USD. The PipValue of each pip (0.0001) is 0.1 USD for the EURUSD pair at 0.01 lots, hence have a profit of $1 USD, the price has to move up by 10 pips (0.0010) to 1.2230.

We assume spread to be 0 for easier explanation of how this Double Martingale Strategy works. If price moves up to 1.2230, the trader would close the trade for the desired profit of $1.

However, if price moves to 1.2210, the trader would face a loss of $1. He will then place 0.02 lotsize sell order at 1.2210, in hope that the price would go down by 10 pips to 1.2200 and he would win $2, covering his initial loss of $1.

If the price moves in the opposite direction he will double his lotsize again to 0.04 and place a buy order. He alternates buy and sell orders every time he loses until he eventually wins.

 

Going Short

The opposite is true for using Double Martingale strategy when starting with a short trade.

For starting with buy trade, the order type will be in this order: buy, sell, buy, sell… and so on. If a trader starts with a sell trade, the order type will be sell, buy, sell, buy… and so on.

 

Double Martingale Strategy Risks:

 

These strategies sound like they are bulletproof, but they might not be. If trades do not go in the trader’s favor for many rounds, the lot size being used will be so huge. The account would not have enough money and it would face a margin call.

Even with a large account size, there are trade limitations set by brokers. For example, there is max lot size given by brokers. Double Martingale Strategy would not work at that point as lot size cannot be doubled when that limit is reached.

The percentage of losing is small but a single lost would wipe out the whole account, hence it is usually not recommended to use only the Double Martingale strategies for trading.

The Double Martingale Strategy can be considered a high risk and with a low return strategy as the trader would risk alot more than what he is about to gain. However, with the right timing and proper analysis, this strategy might work for you.

 

Forex Double Martingale Analysis

Now you should have a better understanding of how the Double Martingale Strategy works in forex trading. For strategies like the Double Martingale, is not recommended to be executed by you manually. It requires alot of time and effort. Even if you watch the price very carefully and execute the trades manually, you would perform as well as a Forex Robot. Forex robots are programmed initially and can do many calculations at the backend in milliseconds. It has the ability to execute trades at the exact point in time and price whenever trading conditions are met.

Does the double martingale strategy work in forex trading?

Let find out!

 

Results on the EURUSD pair for whole year of 2017:

Settings:

  • Starting lots of 0.01
  • $2 USD profit
  • Stop trades at 8pm on Friday
    • The reason for stopping trades on friday is to minimize risk over the weekend.
  • Account balance of 10K

 

Double Martingale Results

Results:
forex double martingale results

As we can see there is a huge drawn down. If there was not enough money in the account, the account would not be able to open next position at that point in time and would have blown the account. But since there was sufficient funds, the account was able to make a win after that, covering the loss. Hence, it was still profitable to use the double martingale over the year of 2017 with these settings.

double martingale results

 

The maximum drawdown was $3687.30. Net profit was $1480.49 in one year. That is about 15% gains, but the risk is very high.

Double Martingale (Hedge)

Using the similar settings, we tested out the double martingale hedging method.

double martingale forex

We can see that in this case, the account is blown. You may be wondering why is it a straight line at the start. It is because the profits are so little that it looks like a straight line compared to the huge loss on the right!

Results:

double martingale forex

Does this make this method worse than the one before?

No. It depends on the time period as well as the settings. When different settings are set, the results will be different.

Speak to us if you like to see more test results of this strategy on other periods or currency pairs.

Do you have other strategies you would like to see results of?

We can run tests so you will know the results immediately. This save you alot time to manually test out your strategies.

 

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