The article I wrote last week about moving averages was an upgrade of some strategies based on the foundation of moving averages. Today, I would like to share all the uses of moving averages, which is more basic and comprehensive than the previous one. After reading these two articles, you will almost have a thorough understanding of every aspect of moving averages, and it can be said that you are an expert in moving averages.

Today's article includes these points:

1: What are MA and EMA?

2: The eight rules of moving averages and examples

3: Four practical methods of moving averages

1. What is a moving average?

When we were in school, we all learned "connecting points to form a line." Moving averages are also formed by connecting one average price point after another. For example, a 60-day moving average is calculated by adding the closing prices of the most recent 60 trading days and dividing by 60 to get an average price. As time goes on, a new average price is formed every day, and when these average prices are connected, they become a moving average.

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Similarly, we can replace 60 days with 90 days, 100 days, 150 days, etc., to get different moving averages.Due to the daily movement of the average price, and its slight variations, the moving average line is also known as the Moving Average, abbreviated as MA.

Two points to note about the moving average:

1: The moving average can be calculated using the closing price of the candlestick, or it can be based on the opening price, highest price, lowest price, or even the midpoint price of the candlestick.

2: Generally, the longer the moving average period, the better the stability, but it also has the characteristic of delayed reaction. Therefore, we often use EMA (Exponential Moving Average). EMA gives more weight to the prices of later candlestick periods when calculating the average price, so EMA is closer to the market trend and more sensitive than the moving average.

2. The Eight Rules of Moving Averages

Let's first discuss what the eight rules of moving averages are.

The eight rules of moving averages are well-known and represent the most fundamental eight uses of moving averages. They were proposed by American investment expert Joseph E. Granville in the mid-20th century, and he also created these eight rules. Because "Joseph E. Granville" is translated into Chinese as "Ge Lan Wei Er," the eight rules of moving averages are also known as the Ge Lan Wei Er method.

The eight rules of moving averages are as follows:

Bullish Rules:

1: The moving average gradually levels out from a downward trend and begins to turn upwards. At the same time, the candlestick crosses above the moving average and closes above it, indicating a bullish signal.2: The moving average is rising, the K-line is above the moving average, it does not break below the moving average during the pullback, and then rises again, go long.

3: The K-line operates above the moving average, breaks below the moving average during the pullback, but the moving average continues to rise, and the K-line quickly gets back above the moving average, go long.

4: The moving average is falling, the K-line operates below the moving average, then suddenly plummets, getting far away from the moving average, at this time it will move closer to the moving average, the K-line will revert to the moving average, and one can go long.

Short selling rules:

1: The moving average gradually levels off from an upward trend and starts to turn downward, while the K-line crosses below the moving average and closes below it, go short.

2: The moving average is falling, the K-line is below the moving average, it does not break through the moving average during the rebound, and then falls again, go short.

3: The K-line operates below the moving average, breaks through the moving average during the rebound, while the moving average continues to fall, and the K-line quickly breaks below the moving average again, go short.

4: The moving average is rising, the K-line operates above the moving average, then suddenly surges, getting increasingly far from the moving average, at this time it will move closer to the moving average, the K-line will revert to the moving average, and one can go short.

In fact, the so-called eight methods are just four trading methods. Since the patterns for entering long and short positions are exactly the same, but in opposite directions, I will use four practical examples to illustrate these four methods.

The first type:Engage in buying when the moving average, which was trending downward, gradually levels out and begins to turn upwards. At the same time, the K-line crosses above the moving average and closes above it, signaling a buy.

Engage in selling when the moving average, which was trending upward, gradually levels out and begins to turn downwards. At the same time, the K-line crosses below the moving average and closes below it, signaling a sell.

In practical trading, the golden cross and death cross of moving averages.

The use of golden and death crosses in moving average trading is derived from this trading rule. Add two moving averages to the chart, the one with the larger parameter is called the slow line (slow signal for trend changes), and the one with the smaller parameter is called the fast line (fast signal for trend changes).

When the fast line crosses from below upwards through the slow line, it is called a golden cross, which is a signal of a bullish trend.

When the fast line crosses from above downwards through the slow line, it is called a death cross, which is a signal of a bearish trend.

This is done by using the fast line to cross the moving average instead of the K-line crossing the moving average as mentioned earlier. There is a reason for this: the K-line weaving around the moving average during consolidations can lead to frequent changes in the direction of buying and selling, making it impossible to trade effectively; whereas the moving average reacts much slower in such market conditions, producing more stable trading signals that are executable.

The second method:

Buy: When the moving average is rising and the K-line is above the moving average, if it does not break below the moving average during a pullback and then rises again, it is a signal to buy.

Sell: When the moving average is falling and the K-line is below the moving average, if it does not break above the moving average during a rebound and then falls again, it is a signal to sell.Go long: The candlestick operates above the moving average. It falls below the moving average during a pullback, but the moving average continues to rise, and the candlestick quickly returns above the moving average, indicating a long position.

Go short: The candlestick operates below the moving average. It breaks above the moving average during a rebound, but the moving average continues to fall, and the candlestick quickly falls below the moving average again, indicating a short position.

Go long: The moving average is trending downward, and the candlestick operates below it. Then, there is a sudden sharp drop, and the candlestick is far from the moving average. At this point, the candlestick will revert to the moving average, moving closer to it again, which is a signal to go long.

Go short: The moving average is trending upward, and the candlestick operates above it. Then, there is a sudden sharp rise, and the candlestick is far from the moving average. At this point, the candlestick will revert to the moving average, moving closer to it again, which is a signal to go short.

Note:

These trading signals mainly appear after a rapid rise or fall in the market. In practice, one can observe whether the candlestick has a vertical rise or fall, which is a very obvious and easily recognizable trend. Then, by observing the reversal pattern of the candlestick, one can enter the market and wait for the candlestick to revert.

Candlesticks and moving averages are like two magnets; once the distance between them increases, they will attract each other and revert.

The above four points illustrate the practical application of the eight major moving average rules. Next, we will discuss four practical methods for using moving averages.3, 4 Practical Methods of Moving Averages in Trading

Method 1: Resonance between Large and Small Cycles, 5-day and 10-day moving averages in conjunction with MACD practical method

(1) For the large cycle, select the 4-hour chart and use the EMA90 moving average. A k-line above the moving average indicates a bullish market, while a k-line below indicates a bearish market.

(2) For the small cycle, select the 15-minute chart and use the EMA5 and EMA10 moving averages.

(3) When the 4-hour chart shows a correction, wait for the moving averages to form a death cross or golden cross on the 15-minute chart, and observe the MACD energy column for coordination.

(When going long on a golden cross, the MACD energy column should be below the zero axis; when going short on a death cross, the MACD energy column should be above the zero axis)

(4) After entering the position, set the stop loss at the high (low) point of the 15-minute chart's correction, and set the risk-reward ratio to 3:1.

Precautions:

(1) Enter the position after the k-line has closed and the moving averages have clearly crossed. If there is a large space for the k-line to run when entering, the stop loss space will be too large. Wait for the market to correct before entering, which will result in a more reasonable risk-reward ratio.

(2) For intraday trading, select 2-3 instruments, such as gold, crude oil, euro to US dollar, and British pound to US dollar, which are all mainstream instruments that can be traded.The second type: Double Moving Average Trading System.

In addition to the eight major rules mentioned above for the use of moving averages, the most frequently used method is to employ moving averages as support and resistance levels. Today's double moving average trading system utilizes the support and resistance functions of moving averages for trading.

(1) Use the MA60 and MA120 on the 1-hour timeframe.

(2) To go long: When the candlestick is above the MA60, and the MA60 is above the MA120, the trend is considered bullish. Enter a long position when the market retraces to the MA60, and set the stop loss below the MA120.

(3) To go short: When the candlestick is below the MA60, and the MA60 is below the MA120, the trend is considered bearish. Enter a short position when the market retraces to the MA60, and set the stop loss below the MA120.

(4) Exit strategy: Set the risk-reward ratio at 3:1.

Precautions:

(1) This trading system can also be applied to the 15-minute or 4-hour timeframe. Timeframes above the daily chart have too large a stop-loss space and are not suitable for use.

(2) You can directly enter the market when the price tests the 60-day moving average, and set the stop loss above or below the 120-day moving average. Once set, the stop loss should not be adjusted even if the moving average prices change.

(3) Conservative traders can wait for a reversal candlestick to form after the price tests the 60-day moving average before entering the market. For the stop loss, wait for the candlestick to close and break through the 120-day moving average before stopping out, to avoid some false signals in trading.The Third Type: The "Triangular Crossover" Trading System of Three Moving Averages

This trading method is primarily used to identify reversal patterns at tops or bottoms. After a bullish or bearish trend ends, the crossover of three moving averages carries a stronger implication of a reversal.

(1) On the 1-hour timeframe, use the moving averages MA5, MA10, and MA20. When MA5 first crosses above (below) MA10, and then crosses above (below) MA20, a triangular structure is formed. This triangle is referred to as a top triangle or a bottom triangle.

(2) To go long. After the establishment of a bullish triangle, the three moving averages align in a bullish trend. Enter the position when the price falls from a high level to MA10, with a stop loss set at the previous low of the price pattern, aiming for a risk-to-reward ratio of 3:1.

(3) To go short. After the establishment of a bearish triangle, the three moving averages align in a bearish trend. Enter the position when the price rises from a low level to test MA10, with a stop loss set at the previous high of the price pattern, aiming for a risk-to-reward ratio of 3:1.

Precautions:

(1) Use the "Triangular Crossover" trading system after a clear bullish or bearish trend, when there is an expectation of a reversal in the market.

(2) Utilizing the short-term moving averages of MA5, MA10, and MA20, the crossover signals are generated early, allowing entry at the beginning of the reversal with potentially significant room for subsequent movement. Aggressive traders may consider increasing the risk-to-reward ratio.

(3) This trading system can be applied to various time frames, such as 5 minutes, 15 minutes, 4 hours, daily charts, and so on.

The Fourth Type: Dual-Period, Bollinger Bands + Moving Averages Trading SystemThis trading system is the one I have been using and also the one I explain to my students in my courses (interested friends can search for it on my public account: Eight-Digit Garden).

(1) The trading system uses the 1-hour timeframe as the primary trend and employs the 5-minute timeframe for entry, which makes it easier to achieve a reasonable risk-reward ratio.

(2) To better establish the effectiveness of profits, I have quantified every detail of the trading system. Whether it is confirming the direction at the 1-hour level, backtesting to establish it, or the entry, stop loss, and take profit at the 5-minute level, everything is very clear, making it convenient for students to complete the entire process from learning, to reviewing, to simulating, to actual trading.

(3) In the foreign exchange market, you can use a combination of the 1-hour level + 5 minutes, or the 4-hour level + 15 minutes. It can be applied to both direct and cross currency pairs, gold, crude oil, stock index futures, and almost all commodities.

(4) This trading system can also be replicated for use in the domestic futures market. Since futures have rules for opening and closing, in the futures market, you only need to adjust the trading time levels to use it.