Discover How to Trade with Moving Averages Even if You’re Losing Money Using it!

Wait. Moving Average might have made you some money, yeah sure!

In the last stages of a bull market, you can buy just about anything and make money with Moving Averages.

My point is, it’s not going to do it forever, especially as the market starts chopping. Let’s take a look at this example:

I use Simple Moving Averages 9 and 21 to illustrate the point. I picked the variable of 9 & 21, but you can use 14, 50, 250, and more or less you will eventually encounter this same situation.

Here’s how Moving Average works- go long on a market when the fast moving-average-line (MAL) crosses up the slow MAL. And short the market when the fast MAL cross down the slow MAL. On many occasions, you will experience false signals like below…

Below is an hourly EURUSD chart on 6th June 2017.

Long EURUSD signal at Point “a”, as the fast Moving Average Line (MAL) crosses up the slow MAL. 

Here I used the variable of 9 & 21. You can apply 14, 50, 250, more or less and you would encounter a similar situation.

The crossover wouldn’t occur unless the price had spiked enough to pull up its 9-day average value above its 21-days average. Most likely you won’t get the MAL crossover signal until the price reaches 1.1261 and you went long at that point.

Moving Average doesn’t work when the market starts chopping!

After then, you might expect a 50pips, 100pips or even 200 pips uptrend movement at time “a,” but 5 hours later, with the Euro’s highest price only touches a disappointing 16 pips uptick (High @1.1277). My guess is, you wouldn’t settle for such a small profit!

In just 2 hours later, you will quickly find the market did not only retrace but dropped below the 1.1261 entry point (see “candlestick b”).

By that time, probably 70% of all traders would have exited the market then and taken the loss.

However, if you are a firm believer of the Moving Average Crossover Strategy and wait until there is a next MAL crossover signal to buy/ sell, You will end up losing more when you receive the next MAL crossover Sell signal at time “c,” as the fast MAL crosses down the slow MAL.

And to look forward a few hours more, the market rallies back and heads in the opposite direction after you sold your position at point “c”. You certainly ended up in a bigger loss!

If you have to go through these kind all false signals (buy at point “a”, sell at point “c”) over and over again, it will probably drive you insane!

So why does the Moving Average Crossover Strategy failed in the EURGBP example above?

First things first, let us understand how Moving Average works.

It is a post- price movement indicator, i.e. a lagging Indicator

Moving Average gives signals AFTER the market has shown a major price movement and the trades using Moving Average are profitable ONLY if such major price movement continues until you close your position.

The KEY success factor of using Moving Average Crossover Strategy is that you need to foreknow the market is undergoing a Strong Trend.

Moving Average works best during trending periods cos it is a lagging indicator.

Conclusion:

FIRST – Analyze the Market Condition – Is it trending or a range-bound market?

SECOND- Use Moving Average only works when you know the market is undergoing a Strong Trend.  

How to tell whether the Market is Trending or Range-bound? 

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