Classic Moving Average Crossover Forex Trading Strategy
Beginner and intermediate traders alike are often misled by the idea that complex strategies are better. How can making money be so simple? Trading strategies should be difficult and confusing for it to be effective, right? Wrong!
Often, traders get into the trap of over complicating things thinking that it is the step in the right direction. However, this usually isn’t the case. I’m not saying that complicated strategies and systems don’t work, it is just that for most, simple strategies work better because it is easier to follow.
So, we go to the basics. One of the simplest classic strategies that many traders start with is the Simple Moving Average Crossover. It is a popular strategy that many traders used to profit from. This is commonly used in stocks and indices. In the forex market however, due to the nature of the forex market being a pull from both currencies, this strategy seemed to have a lot of false signals. But this does not mean that we couldn’t use it. We will be adding a simple feature, a filter, to lessen those false signals.
The Classic Simple Moving Average Crossover Strategy is composed of the 7 Simple Moving Average (SMA) and the 21 Simple Moving Average (SMA). Signals are generated when the faster 7 SMA crossover the slower 21 SMA. If the 7 SMA crosses the 21 SMA to the upside, then a buy signal is generated. If the 7 SMA crosses the 21 SMA to the downside, then it is a sell signal. The trade is closed and reversed only when the opposite signal is generated.
This simple strategy used to rake in so much profits for many traders because it tends to catch big trends early on and exits only when the trend ends. On top of that, traders are always in the market with this kind of strategy. As long as the instrument being traded is a trendy market, making money should be easy. However, in the forex market, short term trends tend to change too quickly, giving false signals. We will be addressing this using a commonly used moving average.
The 200 Exponential Moving Average (EMA)
The 200 Exponential Moving Average (EMA) is an indicator used by many traders. This is usually used as an indicator of the long-term trend. It could be considered as the last line of defense. If price breaks through this moving average, one could say the trend might be shifting. Taking this into consideration, the 200 EMA is usually respected by the market and is usually tough to break through. Taking trades against the 200 EMA while hoping to catch a big trend might not be a good idea.
Then again, the 7 SMA and 21 SMA Crossover Strategy is the exact opposite. It tries to catch big trends while using short term trend signals. For this reason, signals generated by this crossover strategy which goes against the 200 EMA might have the cards stack against it. For one, if ever the signal wasn’t false, the trade has a very small room to breathe since there is a high chance that price would just bounce off the 200 EMA. If ever the signal was indeed a real signal, if ever the trade works out, there might be just too little profit to get out of it. The juice might not be worth the squeeze. We will be showing these signals and bounces in a little while.
7 SMA crosses the 21 SMA to the upside
Price is above the 200 EMA
Enter at the close of the candle
Stop Loss: A few pips below the entry candle on the opposite side of the SMAs.
Exit: The 7 SMA crosses the 21 SMA to the downside.
On this example, you would notice that the SMAs crossed over on our entry signal and continued for a nice profit. There are many more buy signals on this trend many of which would have been profitable.
7 SMA crosses the 21 SMA to the downside
Price is below the 200 EMA
Enter at the close of the candle
Stop Loss: A few pips above the entry candle on the opposite side of the SMAs.
Exit: The 7 SMA crosses the 21 SMA to the upside.
The 7-21 SMA Crossover Strategy is not a perfect strategy. As promised earlier, below are examples of failed trades, using the exact same chart as the first one.
The first failed trade is a good example of how a trade opposite the 200 EMA would have little room to make a profit. If you would notice, the SMAs did crossover for a sell signal, however, it is on the wrong side of the 200 EMA, and it is way too close to the 200 EMA. As soon as price touched the 200 EMA, it stalled and later reversed for a loss.
The second failed trade is quite far from the 200 EMA, but still it failed and closed for a loss, or would have even been stopped out. This could be because since many traders are looking at the 200 EMA as the long-term trend, and maybe other EMAs for the intermediate trend, the bias of many traders might have still been bullish, thus defeating the bears looking who might be looking at the crossover.
This classic 7-21 SMA Crossover Strategy, on its own, though it could work, but would have had many false signals. Adding the 200 EMA was a good example of filtering out false signals. There could be many other derivatives of this strategy. Some use the price as confirmation. Some would look at the market structure as a filter. Some would add other indicators to confirm momentum. What this strategy provides is a good framework to start with, which you can develop further.
How to install Classic Moving Average Crossover Forex Trading Strategy?
Download Classic Moving Average Crossover Forex Trading Strategy.zip
Copy mq4 and ex4 files to your Metatrader Directory / experts / indicators /
Copy tpl file (Template) to your Metatrader Directory / templates /
Start or restart your Metatrader Client
Select Chart and Timeframe where you want to test your forex system
Right click on your trading chart and hover on “Template”
Move right to select Classic Moving Average Crossover Forex Trading Strategy
You will see Classic Moving Average Crossover Forex Trading Strategy is available on your Chart