I’m going to share the moving average methods that I have found to be the most useful in my more than 10,000 hours of trading experience.
I’ve been trading for many years, and my go-to tool has always been the moving average, especially the exponential moving average. It’s useful because it responds fast to price changes, which is important when I’m dealing with shorter time frames where prices move quickly.
I am not saying that a simple moving average is bad. In the ‘5 Best Moving Average Strategies’ I’m going to show next, you can also use a simple moving average if you like it more. Also, all these strategies are not just entry strategies. Well, mainly because the moving average is not a great indicator for taking entries. There are some good moving average strategies, like when we tested its popular crossover entry strategy on the main channel, the win rate moving average got was good. But you can do much better things with the moving averages than just taking entries. So instead of just entry strategies, I’m going to share the moving average methods that I have found to be the most useful in my more than 10,000 hours of trading experience.
Number 1.
In our first strategy, we’ll transform the big disadvantage of the moving average into an advantage. The moving average takes the data from a specified number of previous candles. For example, if you consider a 9-period moving average, it will gather data from the last 9 candles and calculate an average.
Now, imagine a scenario where a big candle is formed on the 10th candle, and the price moves sharply in one direction. Since the moving average calculation uses data from the past 9 candles to determine an average, it won’t account for this sudden large candle immediately. In simpler words, it doesn’t react swiftly, as it tends to moderate the effect of the previous 9 candles.
This characteristic of the moving average is often referred to as ‘lagging’ in trading. You may have heard traders say that certain indicators lag. In this context, the moving average is considered one of the most lagging indicators. If you use a longer moving average, like 50, 100, or 200, the lagging effect increases. The longer the indicator, the greater the lag. However, we’ll turn this lag, or disadvantage, into an advantage.
As a beginner trader, I found it challenging to identify a range-bound market, and many new traders face this issue. Let’s look at a chart of a range-bound market. Here, the price was trending, rising from a lower point. Afterwards, it started fluctuating around the same level, creating similar highs and lows. If we connect these highs and these lows, we can identify resistance and support levels, respectively. This could be done manually, but if we use the Moving Average, particularly the 200 Moving Average, it will be more apparent.
In a range-bound market, you’ll notice that the price crosses the Moving Average repeatedly. Contrast this with a trending market, where the price was consistently above the Moving Average. Once the market turned range-bound, the price began to cross the Moving Average frequently. This happens because the indicator, which takes into account many past candles to calculate its value, remains relatively flat as it doesn’t react quickly.
These two elements – the price crossing the Moving Average repeatedly, and the flatness of the Moving Average – form the basis of a range market filter strategy. Using this method, I’ve successfully identified many range-bound markets. That concludes our first strategy. Now, let’s proceed to the second one.
Number 2.
One common problem that beginner traders face is understanding how to identify momentum. Everyone suggests looking for price momentum before making a trade, but recognizing momentum can be somewhat challenging for beginners. One approach I used to overcome this issue involves using these 3 moving averages, the 9-period Moving Average, 20-period Moving Average, and the 50-period moving average.
If you observe these three moving averages during a trend, you will notice that the 9-period Moving Average is on top, followed by the 20-period Moving Average, and then the 50-period moving average at the bottom in an uptrend. In a downtrend, this order is reversed: the 50-period moving average is on top, followed by the 20-period Moving Average, and then the 9-period Moving Average at the bottom.
Usually, we use a single moving average to identify the trend, but here we’re determining which side has more momentum. For example, if we see a pattern of 9, 20, and 50 in an uptrend, we can infer that the uptrend is strong. If the pattern is 20, 9, and 50 in an uptrend, the uptrend might be considered somewhat weak. An even weaker uptrend would be indicated by a pattern of 50, 20, and 9.
In a downtrend, if the pattern is different from the 50, 20, 9 sequence, say, for example, 50, 9, 20, we could say the momentum is weak. A 9, 20, 50 pattern is not that good in a downtrend. We want to see more 50, 20, 9 pattern in a downtrend.
Another indicator of strong momentum is when these three moving averages move further apart from each other. For example, in this chart, the price moved upward, and at the same time, the three moving averages moved away from each other. And in areas where the price momentum is low, these three moving averages converge or get closer to each other. So, you can determine momentum based on the width and narrowness of these moving averages. If the moving averages are wide apart, the momentum is strong, while a narrow gap indicates low momentum.
Moreover, keep in mind that the pattern of 9, 20, and 50 Moving Averages won’t last for an extended period. It lasts for a while, then transforms into something else, indicating that the market is slowing down. Although this triple moving average technique is not a foolproof indicator, if you’re having trouble identifying the momentum strength, it can provide an extra layer of assistance. With that explained, let’s now move on to the third strategy.
Number 3.
The third strategy was one of my favorites when I transitioned to the stock market. Upon entering the stock market, I was trading in shorter time frames, mostly less than five minutes. In such time frames, it’s crucial to trade with a focus on momentum, as other indicators and strategies aren’t as effective. However, as a beginner trader, identifying momentum was a bit challenging due to the good amount of ‘market noise’.
To resolve this issue, I began using the 9-period moving average. Let’s consider this chart, for example. As you can see, the price opened lower than the last close, and as soon as it opened, it began to drop. The downward momentum was strong, as evidenced by the price remaining consistently below the 9-period moving average throughout this decline. As soon as the downward momentum ended, the price moved above the 9-period moving average and stayed there as long as the upward momentum was strong.
This strategy was greatly beneficial to me because I was able to observe that if the price stayed on one side of the 9-period moving average for an extended period, and then started to trend in the opposite direction, it was a good signal for me to prepare for a short entry.
With more experience, I’ve now learned how to trace momentum without relying on the moving average. Therefore, I no longer use the 9-period moving average as much as I used to. However, this strategy can be very beneficial for beginners, especially if you’re encountering challenges similar to those I faced when I was starting out.
Number 4.
Now, let’s talk about another strategy I used when I was more into swing trading, especially when I saw the price had a lot of room to move in the entry direction.
Take a look at this chart. Here, the price moved down and then made a good reversal in the upward direction. Then it made another downward swing, but this swing was not able to cross the previous swing low. You will notice that, now, a double bottom price pattern is formed. This is a good sign of a good support area.
Some traders prefer to wait until the price breaks below this support area before making a trade. Let’s say you took a short trade on the breakout. You want to catch as much profit as possible because there is no other support nearby. The price has a lot of room to move in the entry direction. But the truth is, no one can tell because nobody can predict the future. The price can reverse early. So the question arises, how long will the price continue to move in the direction of the breakout?
That’s where a longer-term moving average, like the 50 or 200-period moving average, comes in handy. If you set your stop loss above the moving average, your trade might look something like this:
Imagine this red line is your stop loss line. Then, you can simply move and trail the stop-loss lower as the moving average goes lower. When the downward momentum is lost, the price will cross above the moving average and will automatically book the profit.
In my experience, the 50 or 200-period moving average works well for swing trading. If you aim to track price movements in day trading, shorter periods like the 9-period or 21-period moving averages might be better choices. The philosophy here is to enter and exit trades quickly.
Extra Strategy:
Before diving into the fifth moving average strategy, I’d like to introduce an additional moving average strategy. This will be particularly advantageous for beginner traders.
To start, set up a normal moving average on your chart, a 20-day moving average, for example. Then add another moving average a few per cent above this moving average. For instance, you could add another 20-period moving average 5% above the normal 20-day moving average. On the other side, place another 20-period moving average 5% below the normal 20-day moving average. This setup will create a channel-like structure which will allow you to apply several trading strategies.
One common issue for beginners is identifying whether a trend is getting stronger or weaker. If you want a trend strategy to be effective, it’s very important for the strength of that trend to be strong. With this moving average setup, you can do just that. If the price rises above the upper moving average, it indicates strong upward momentum. If there’s an upward trend, you could then more confidently say that the trend’s momentum is strong. Whenever the price gives a pullback, one can consider entering in the upward direction.
For a downward trend, simply apply the reverse logic. When the price breaks below the channel, it suggests that the strength of the downward trend is still strong.
Let’s now proceed to the second method. If you’re a trend trader, you may prefer trading pullbacks. However, identifying good pullbacks from bad pullbacks can be challenging. With this moving average channel structure, it’s easier to do that. If the price rises above the upper channel, we know that indicates that the strength is good. But if the price falls below the lower channel in an uptrend, it can suggest that the pullback is good or big enough. Near this breakout, one can look for long entries. I would use an indicator such as MACD for the entry point.
In a downtrend, if the price breaks above the upper band, it indicates that the pullback is good, and you can then take an entry in the downward direction.
The third method is for scenarios where the market is ranging. Some traders wait for the price to move outside these moving average channels. If the price breaks above the upper band, they go short in the range market. And, if the price breaks below the lower band, they go long in the range market. In my experience, this method is not very effective for range trading. In my experience, drawing support and resistance levels manually and then trading based on those is better.
This three moving average setup I just described is better known as “the moving average envelope”. To set this up, you won’t need to write any percentage code. You can search for a moving average envelope on TradingView or any other charting platform. On TradingView you will find different versions of this indicator from users and from TradingView. The one I used was TradingView’s in-built indicator called “Envelope.”
One important point to note is that this envelope appears differently in different time frames. For example, it looks wider on smaller timeframes. But on larger time frames, the envelope’s size becomes smaller as the percentage remains constant. So, if you wish to use this envelope, you’ll need to adjust it for each time frame from the settings, which is kind of a small disadvantage in my opinion. That’s why I’ve included it as an extra strategy.
Otherwise, it’s an effective way to identify the strength of trends and pullbacks, and it can be especially useful for beginners.
Number 5.
On this chart, watch how the price interacts with these levels. In a downtrend, the 200-period moving average acts like a barrier. The price drops, then climbs until it hits the 200-period moving average and starts to drop again.
One of the strategies I use the most is to sell short on downward momentum whenever the price pulls back to the 200-period moving average resistance. I’ve been doing this from the start. I believe it’s the best moving average strategy.
You might be wondering if taking a short trade without any indicator is a good idea if the price comes near a 200-period moving average resistance like this. I wouldn’t recommend that for most scenarios. From what I’ve seen, this moving average support and resistance strategy, especially on higher timeframes, works better when used with a confirmation strategy, like the MACD or another momentum strategy.
These indicators can help you spot a change in momentum when the price is near the moving average. For example, if the price forms a lower high lower low pattern downtrend pattern, then goes up to the resistance of the 200-period moving average, and the MACD shows a short crossover or the RSI leaves the overbought zone, one can take a short trade. That’s what I do.
Take a look at this chart. It shows that as soon as the uptrend started, the moving average began acting as a support level. Whenever the price fell, it tended to bounce back near the moving average.
But keep in mind, the price doesn’t always bounce back near the moving average. The moving average support and resistance levels are more like zones than exact lines. Not everyone will jump into a trade as soon as the price hits the moving average. If there’s a strong demand for buying, the price might start to bounce back before it even reaches the moving average.
In this example, notice how the price bounced back four times in the direction of the uptrend and only hit the moving average once. The other times, it rebounded before reaching the moving average.
From my experience, the 200-period moving average has proven to be the most helpful for support resistance. Sure, you can try other moving averages as well if you like them more. Here’s a 50-period moving average instead. You can see here a strong downward trend with lower upward swings. The price faced resistance at the 50-period moving average. However, don’t also think that the price will always find support or resistance at the 50 or 200 moving averages.
If the trend is moving fast, a smaller moving average might be a good choice, such as a 9-period moving average. But, as I’ve mentioned before, in my experience, the 200-period moving average tends to be more trustworthy. It generally shows bigger upward swings, giving more room for the price to move in the direction of your trade.
If you’re not sure whether to go with a small or large moving average, some traders use multiple moving averages. For example, you could use both a 50-period and a bigger moving average like the 100-period. If that’s still too confusing, you can use three or four moving averages of different sizes, as shown on the chart.
You can work out which moving average the price is following as support and resistance. For example, in this chart, the price followed the 50-period moving average as support and resistance, and then later, it followed the 200-period moving average.
However, if you put too many moving averages on your chart, things can get a little confusing. To keep your charts tidy and make it easier to analyze price action, you might want to stick to just one or two moving averages at a time.
Remember how we used three moving averages to spot momentum and range markets a few minutes ago? In the same way, you can use a longer period moving average to identify long-term momentum and major price changes. In this chart, the momentum was strong, and all the moving averages were far apart, with the 50-period moving average at the bottom, then the 100-period, and finally the 200-period at the top. This shows a strong downward trend pattern, just like what we’ve talked about before.
When the moving averages started to move closer together and the price started crossing them, it signaled a potential range or a slow movement market. So, you can also use bigger moving averages to filter out long-term movements like this.
So, there you have it. These were the five best moving average strategies or methods that I have found to be the most useful in my 10,000 hours of trading experience.
