Strategy for Moving Average “Fan”
Moving averages or the correct name Moving average are the very first technical indicator that was created specifically for an objective assessment of price movement by averaging its value over a certain period in order to cut out market noise.
Thanks to simple averaging traders were able to achieve a better definition of the trend, and as a result, its reversal.
It is this simple indicator that has become the basis for many other technical analysis tools, not to mention trend strategies, of which there can be hundreds and all of them have a right to exist.
However, for many to this day it remains a mystery which Moving Average periods are optimal for trading, because each period has its own unique information content, taking into account one or another level of market noise.
In fact, there is no clear answer to this question, but at the same time, the practice of using several moving averages with different periods at the same time is very widespread.
The Moving Average “Fan” strategy is a trend trading strategy that consists only of the Moving Average but with the use of different periods to assess short-term, medium-term and long-term trends in the movement of an asset.
The strategy received its name “Fan” based on the key signal of the strategy, when during periods of large trends the moving averages line up one after another at a certain distance and resemble an unfolded fan.
The strategy is very picky about time frames, because as practice shows, the higher the chart period, the fewer false movements are observed on it. Therefore, the strategy can be applied on the hourly and higher charts.
Also, the Moving Average strategy can be used on all currency pairs simultaneously, the only thing you need to pay attention to is broker spread size.
Building a strategy based on Moving Average
Moving averages are notable because in today's environment they are built into all trading platforms.To recreate the strategy based on the “Fan”, you will need to plot five exponential moving averages with periods of 7, 20, 30, 60, 90 on the chart. Be sure to assign different colors to the lines so as not to confuse their location with each other.
A special strategy template has been prepared for traders using the MT4 trading terminal. You can download it at the end of the article, after which you will need to install it. To do this, you just need to drop the downloaded template file into the appropriate folder in the data directory, and in Template.
Then, after you restart the trading terminal or update it in the navigator panel, open the four-hour chart of any currency pair and launch the “Fan” strategy template on it. You will get the following picture:
Application practice
Most trend strategies become helpless when flat in the market, since in most cases they are all aimed at catching short-term trends or impulses.
In the case of the “Fan” strategy, its key signal is aimed only at strong trends, while weak trends and sideways are eliminated right there on the spot. By the way, sideways and undesirable moments for trading on the chart look like this:
When starting to trade, it is very important to start by assessing the long-term trend. To do this, pay attention to moving averages with a period of 60 and 90.
If the moving average with a period of 60 is above the moving average with a period of 90, we consider signals only for purchases, and if below it, we consider positions only for sales.
When trading, all moving averages should be placed one after another in ascending order for purchases and in descending order for selling, which should resemble a fan.
Buy signal:
1) MA 60 is located above MA90.
2) MA 30 is located above MA60.
3) MA 20 is located above MA 30.
4) MA 7 is located above MA 20;
At the moment when all the moving averages line up one after another, opening up like a fan, a buy position is opened.
The stop order should be placed below or at the level of the Moving Average with a period of 90. To close a position, you can use the reverse intersection of the moving averages with periods of 7 and 20.
Sell signal:
1) MA 60 is located below MA90.
2) MA 30 is located below MA60.
3) MA 20 is located along MA 30.
4) MA 7 is located under MA 20;
At the moment when all the moving averages line up one after another, opening up like a fan, a sell position is opened. The stop order should be placed above or at the Moving Average level with a period of 90.
To close a position, you can use the reverse intersection of moving averages with periods of 7 and 20, namely, if the moving average with period 7 crosses the moving average with period 20 from top to bottom.
In conclusion, it is worth noting that signals from the “Fan” strategy are received quite rarely, however, since the profit is almost always many times greater than the stop order, its effectiveness is at a very high level.
Also pay attention to swap, since positions can be held in the market for several days!
Download the strategy template for Moving Average “Fan”