Moving Average Trading Strategy
A Moving average will calculate the average price of the security or a given time.
If the price is moving above the moving average, it indicates the buying signal.
If the price is moving below the moving average, it indicates the sell signal.
But the same moving average is not going to be profitable at all stocks at all times.
So to know which moving average would work best on which security, one needs to perform backtesting.
Once we can find the moving average, in which we can make profits, we will trade with the help of that profitable signal.
Our first moving average trading strategy is
Double moving Average trading strategy Cross Over
The use of the double moving average trading strategy crossover is more effective than the single moving average.
Buying when the shorter period moving average crosses above the more extended period moving average.
Sell when shorter period moving average crosses down the more extended period moving average.
To overcome the market volatility of more buying and selling signals of the moving average, we can add the RSI indicator.
We can add RSI to get accurate results.
The relative strength index will be helpful to take the trade or exit from the market.
RSI will confirm to take the trade or exit.
If the RSI level is above the value of 50, then it is the most probable of entering the buy trade.
If the RSI level is below the value of 50, it is the most probable to enter the sell trade.
If you had entered the trade above the RSI 50 level, In the middle of the market, if the value of the RSI drops below 50 (It will occur in rare cases), In that case, the trade may not perform most accurately.
Remember one thing; all indicators will show the direction of the market.
Bullish crossover is a golden cross, whereas bearish crossover is called a death cross.
The commonly used moving average are 50, 100, and 200 periods and for short-term trading trends, we can use the set of 10 and 20 moving averages.
We have two moving averages, the green line is the ten-period moving average, and the line red is the 20-period moving average.
When the green line is above 20 periods red line, we are getting a buying signal.
When this green line crosses below the red line that is the 20-period moving average, we get a selling signal.
On getting a buying signal, without confirmation of the RSI, when the RSI is below the 50 levels, the trade will not work much accurately.
Taking trade when the RSI crosses the 50 levels will be the most accurate trade.
On getting a selling signal, without confirmation of the RSI, when the RSI is above the 50 levels, the trade will not work much accurately.
Taking trade when the RSI is below the 50 levels will be the most accurate trade.
The next moving average trading strategy is,
Three Moving Average Trading Strategy Crossover.
In this strategy, we use three moving averages instead of two, the short-term, midterm, and long-term moving average.
The short-term moving average is to pull the trigger; when it crosses above or below the mid-term moving average, it gives the enter and exit signal.
Long term moving average is to tell about the trend.
We can buy when the short-term moving average crosses above both the midterm and long-term moving average..
Exit when the short-term moving average crosses down the midterm moving average.
Sell when the short-term moving average crosses down both the mid-term and long-term moving average.
Exit when the short-term moving average crosses above the mid-term moving average.
Each moving average should be multiple of two from one another.
The short-term moving average is five periods.
The mid-term moving average is ten periods.
The long-term moving average is 20 periods..
We will add the Bolinger band to our three moving average trading strategy crossover setup to avoid false signals.
When getting a buying signal in three moving average trading strategy crossovers, the Bolinger band will slope towards the buying side.
The Bolinger band will slope towards the selling side when getting the selling signal in three moving average trading strategy crossovers.
When getting the false signals, the Bolinger band will move horizontally without sloping towards the buying or selling side.
Target should be 1:1 and more, and stop-loss should be at the day low.
Bolinger band will give the early signal, whether the market is moving towards the bullish side or bearish side.
If the Bolinger band is in a narrow position, that means contracting, and the signal is that market is in consolidation mode, so do not enter any trade while the market is in consolidation mode; wait for the scrip for picking movement.
The signal of whether the market is picking movement is, our indicator Bolinger band will expand, or it will show some expansion moment.
You can enter the trade after the expansion of the Bolinger band.
Remember Bolinger band will show whether the market is in bullish mode, consolidation mode, or bearish mode.
When the candle has opened outside the Bolinger band, that trade will not be much effective.
Trade will be effective when the candle stays on the inner side of the Bollinger band.
I will trade when the candle is on the inner side of the Bollinger band.
I will avoid trading when the candle opens outside the Bollinger band.
By combining the moving average trading strategy with RSI and Bolinger band, the trade will be accurate and profitable.
All the above cases discussed are all probabilities; there are no sure shot points in the stock market.
I may confidently say that if you follow the above rules, you can get the most accurate trade.
The trading view platform is the ocean of indicators and screeners also available in this platform.
Tools that can be helpful for trading are under one roof.
For more accurate and profitable information you can contact us.
We are not running an advisory company; we are just sharing our knowledge.
These are our trending articles