The use of moving averages has always been a subject of much debate. Some people believe that moving averages are too basic and not very useful, while others think that a single moving average can conquer the world, and that using moving averages is more than enough for trading profits.
In fact, these views are rather one-sided, as there is no perfect indicator in this world, nor is there an absolutely useless one; it all depends on the person who uses the indicator. Whether an indicator can be used effectively depends on our technical skills, understanding, and ability to control details.
Moving averages, as a trend-following indicator, can yield significant profits in trending markets. However, their main issues are the relatively low success rate and the erosion of net value in sideways markets.
Today, I will discuss the advantages and disadvantages of moving averages and how to improve the success rate of single, double, and triple moving average trading strategies in practical applications. I will provide many examples and try to explain in the clearest way possible. These are also more advanced uses of moving averages, so you can bookmark and read them.
1: Single Moving Average
A single moving average with a large parameter can filter out sideways markets, thereby increasing the success rate.
One of the logical uses of moving averages is that when the moving average flattens, it usually indicates that the market has entered a consolidation phase. Identifying and filtering out consolidation is the most effective and direct method to improve trading success rates.
In practice, many people find that using a flat moving average to judge that the market has entered a consolidation phase does not have a high success rate. Often, just as the moving average flattens and the market begins to consolidate, a trend suddenly starts, catching traders off guard.
This situation mainly arises because the moving average parameter used is too small, resulting in poor stability, which is not conducive to identifying significant consolidation phases.It is recommended that everyone use moving averages with parameters of 180 or higher to observe and filter out market noise.
Because moving averages with larger parameters require more candlestick price calculations, they will be more stable technically, and the success rate in identifying noise will be higher. Whether it is trading by selling high and buying low during the noise or waiting for a breakout trend after the noise, the success rate will be higher.
The chart shows the 1-hour candlestick chart of spot gold.
After the market reversed from the bottom and entered a horizontal consolidation pattern, the moving average of 220 gradually flattened over four consecutive days, which is very obvious.
Focusing on the consolidation pattern, it is found to be a very standard triangle consolidation. After the triangle consolidation breaks, the market rose sharply.
There is a point to note here. Before the breakout, the market was slightly fluctuating below the descending trend line of the triangle consolidation. Aggressive trading can focus on this breakout point at a smaller level, such as 5 minutes, for entry and operation, with a very small stop loss and a very large reward-to-risk ratio.
Points to note:
Use large moving average parameters to observe and filter out noise after a significant trend.
Combine other technical aspects of market consolidation, such as paying attention to the consolidation pattern of the noise, like rectangle consolidation, triangle consolidation, and flag consolidation combined with a flat moving average, which makes it easier to discover and identify noise.
This method may miss small-level breakout trends, but it doesn't matter. Focusing on the big picture and letting go of the small details, the overall success rate is high, and profitability is more important in trading.There is a requirement for the number of K-lines in a volatile market, with at least more than 40 K-lines needed for consolidation and a flat moving average.
A single moving average combined with other technical criteria to confirm support and resistance can increase the success rate.
At the support and resistance levels, the reversal or rebound of the trading market is the trading pattern for the vast majority of traders. The key to this pattern is to accurately locate the support and resistance levels to ensure the success rate.
However, accurately identifying the support and resistance levels is also a pain point and difficulty for the vast majority of traders. There are so many high and low points on the chart, and there are so many technical criteria, so where is the important support and resistance position?
At this time, we use the moving average and other technical resonances, and the advantages can be reflected.
Because the moving average is directly reflected on the chart, it first locates an area of support and resistance. Near this area, we combine other technical criteria for resonance, and we can more efficiently find the support and resistance positions.
When the K-line is above the moving average, look for support below; when the K-line is below the moving average, look for resistance above, and the goal is very clear.
The chart is a K-line chart of gold at the hourly level. After the market fell from 2367, it went below the 120 moving average and looked for resistance above the K-line. First, the Fibonacci 38.2% level, 2336 can be used as a resistance level, and 2336 is also a dense area of previous transactions.
The market rebounded upward, and the first time it only tested the 120 moving average, but did not reach 2336, and did not achieve the effect of resonance, so it was not traded for the time being. After that, the market surged for the second time and tested 2336.
After the test was in place, a reversal K-line pattern was formed, and at this time, it was possible to enter the market to go short, and then the market fell sharply.When translating the given text into English, please ensure that the translation is accurate and maintains the original meaning. Here is the translation:
Pay attention to the following points:
Confirm the order by first finding the moving averages, and then looking for other criteria.
It is sufficient to select 2-3 fixed additional criteria; the aggressive can confirm entry when two of the three criteria are met, while the conservative requires all three criteria to be met before confirming.
2: Double Moving Averages
When the double moving averages cross, it is difficult to distinguish clearly when the long-term cycles are sticky; observing from a shorter cycle provides a clearer view and higher success rate.
The most important uses of double moving averages are the golden cross and the death cross. The golden cross indicates that the market will rise afterward, while the death cross indicates that the market will fall afterward. This method is very clear and simple, and can be used both as a standard for judging trends and as a signal for entering trades.
However, in practical application, this method has a significant drawback: when the two moving averages stick together, it is unclear whether they have crossed. This type of trend usually occurs when the amplitude of the K-line is relatively small, and the rise or fall trend is slow.
When it is unclear whether to enter the market, this is referred to in trading as a "pseudo-cross."
Another issue is that after a large K-line closes and crosses, if one wants to enter the market at that time, the stop loss is quite large, and the entry point becomes unfavorable.
In practice, there is a more effective, clearer, and higher success rate approach, which is to observe the crossing of moving averages from a shorter cycle.Let's start by discussing a theory of moving averages: A 10-period moving average on the 1-hour chart is equivalent to a 120-period moving average on the 5-minute chart.
Moving averages are calculated from the prices of candlestick charts. From a technical perspective, moving averages of different periods have an equivalent relationship.
For instance, a 10-period moving average on the hourly chart is equivalent to a 120-period moving average on the 5-minute chart because 1 hour consists of 12 five-minute candlestick charts.
They both cover the same time span.
The 10-period moving average on the hourly chart summarizes the price data from the past 10 hours (10 x 60 = 600 minutes).
The 120-period moving average on the 5-minute chart also summarizes the price data from the past 10 hours (120 x 5 = 600 minutes).
Therefore, they actually reflect the same data, just with different time frames.
In practice, when encountering an unclear crossover or entanglement of the 1-hour moving averages, and it's hard to discern whether to enter the market, observing the moving averages with the same proportional relationship on the 5-minute chart can yield better results and higher success rates.
The chart shows the candlestick chart of spot gold, with the left side being the 1-hour chart and the right side being the 5-minute chart.
In the left chart, the 10 and 20 moving averages are entangled, showing a situation that is neither a cross nor a non-cross, which is very ambiguous. In such cases, it is unclear whether one should enter the market.However, at the same moment, the 120-day moving average and the 240-day moving average on the 5-minute chart showed a very clear golden cross entry signal. It is very clear that one can enter the market by observing the 5-minute chart.
Points to note:
Pay attention to the conversion of moving average parameters for different time frames.
This conversion of moving average parameters on the k-line chart of different time frames can also be used in other trades, such as in the role of support and resistance above, and everyone can test it by reviewing the charts.
The strategy of multi-period dual moving average resonance can also improve the success rate.
Next, it is still a question of moving average crossover, the trading technique of golden cross and death cross is very simple, but in fact, the success rate is relatively low, especially in the oscillation, frequent golden crosses and death crosses can make people dizzy, which is why there are many people online commenting that the technique of golden cross and death cross is useless, and moving averages are useless.
In fact, any technical method has its own application scenario, and it is more effective when used under certain conditions.
Just like in the battlefield where the troops are limited, it is necessary to avoid the heavy and focus on the light, and wait for the right time and place to find the opponent's weaknesses. The "avoid its sharpness, strike its laziness" in Sun Tzu's Art of War is what is being said here.
So the method of golden cross and death cross should also be used at certain specific moments when the success rate is high.
When the market runs significantly and encounters important support, and the market has the possibility of reversal, wait for the 1-hour chart to confirm the reversal crossover, and then trade in line with the cross from the smaller level such as 5 minutes.By leveraging the clear advantages of large-scale trends, the success rate of moving average crossover trading can be improved. Please see the image below.
The chart shows a 1-hour candlestick chart of gold, where the market fell from a high level to test the hourly chart support near 2290. After that, the market began to bottom out and reverse, forming the first bullish wave. Subsequently, the moving averages crossed, confirming the reversal.
Switching to a 5-minute chart, we use the same parameters for two moving averages to go long on a golden cross, with the stop loss set at the low point of the 5-minute chart for swing trading. The space for the stop loss is very small. The red circles in the chart represent successful trades, while the blue circles represent unsuccessful trades, indicating a high success rate.
Key Points to Note:
As an entry signal, the parameters for the moving averages should not be chosen too large; it is preferable to select within 30. Large moving average parameters have too much lag, and signals appear too slowly, which can easily lead to missing the market. The parameters for the two moving averages in the chart are EMA30 and EMA15.
3: Three Moving Averages
Triple Moving Average Golden Triangle Crossover Filtering to Improve Success Rate
There is a special pattern in the use of three moving averages, which is that when the market reverses, it forms a triangular crossover pattern. This pattern is more stable than the golden and death crosses of the double moving averages.
The chart is a 1-hour candlestick chart of spot gold.
In the red circle at the top, the process of the three moving averages turning from bullish to bearish and gradually changing direction. Due to the different speeds at which the moving averages change, they form a structure similar to a triangle, which is called the Golden Triangle. After that, the market begins to decline.After the market stabilizes following a decline, it consecutively forms three golden crosses with the double moving averages below, but the trend does not reverse; instead, it continues to oscillate downwards. It is not until the last time, within the red circle on the right side, that the market forms an upward golden triangle again, which then leads to a reversal.
By employing the golden triangle pattern of the triple moving averages, false signals from double moving average crossovers can be filtered out, thereby increasing the success rate of trades.
Points to note:
The golden triangle can serve as a basis for entry as well as for opening positions.
The parameters of the moving averages can be set according to the individual circumstances of the trader; the parameters in the chart are: EMA30, EMA50, EMA90.
The above is an advanced practical method for improving the success rate of trades using moving averages. You can use it as a reference for your own trading standards, but remember to conduct extensive backtesting before engaging in actual trading.
