The Trading Strategy:
Three MA Cross
Trading Strategy Implementation:
Use three simple MAs at different speeds and trade the crosses of the two faster moving MAs with the slower moving average applied as governance for the trend or direction of trades. This is probably somewhat a wordy explanation, and will certainly be helped with the support of images, which are provided below.
The idea is relatively simple. Three MAs are placed on a chart. In this case we are using the 15M chart. Chart preference is up to the trader. The Pipster belief is that the close to the tick chart, the less reliable the chart is. For the sake of explanation, we will apply the Three MA Cross trading strategy to the 15M chart for the sake of intraday traders.
The three MAs we have selected are the 5, 55, and 200. The reason for this has to do with speed. We need a MA that moves very close to the price action, one that moves at the speed of intraday trend, and finally, a moving average to move along with the overall market trend. The 5 is set to the price action. The 55 is set to intraday trend. And the 200 offers us an overall governor of market trend.
For the sake of simplicity, we will assign a simple color scheme to trio of MAs in order to help with understanding.
- 5: Green
- 55: Yellow
- 200: Red
When the green and yellow are above the red, we are bullish. When the green and yellow are below the red, we are bearish.
As we dress another image of the approach (taken at random) we employ the trade strategy to the chart, and historically address the strategy’s success/failure in this market scenario. (For the sake of simplicity, the buy order and it’s relative SL and TP are color coordinated. The same can be said of the sell order.)
The trades are initiated at the point of the 5 crossing above the 55 for buys and the point of the 5 crossing below the 55 for sells. Again, as we employed with the Two MA Cross Strategy, we will set our Take Profit three times the distance of our Stop Loss. Our Stop Loss is set at the most recent trend starting area, as suggested by the image below.
In the particular image chosen at random, we see that the approach failed initially, with the buy unable to reach our intended target. The following trade, a sell, which would have been made around the 1.31490 area definitely would have led to a healthy win and net profit for the strategy.
As has been stated elsewhere on this Forex trading blog, any trading strategy that requires the use of an indicator for entries is going to have to be considered a risk. The reason for this is that the indicators are all derivative of price, and as a result, lag considerably. As was mentioned in the Two MA Cross, the fact is many false signals can also be given by a “wiggling” MA. Sometimes it appears to cross, and then turn back. If the trader is to wait for the crossing, the fact is price has more than likely moved well beyond the point of the actual cross.
We Pipsters do not employ such strategies, and for the most part look to do away with indicators. However, we do not claim, by any means, that they lack all relevance. This Three MA Strategy is preferred to the Two MA Strategy by us because we do like the trend following filter that is the slowest MA. Chances are the levels and time frames may need to be adjusted to properly work with certain markets. Nevertheless, there is definite merit in the approach, and we definitely can say that a sound Money Management system and strict adherence to the trade filters would likely lead to a responsible start for any trader.
Any suggestions for developing this strategy are welcome. Please do offer the community any thoughts you may have through the comments section.