[Trading Education] Advanced use of Moving Averages, and how to set up a profiting strategy Bybit Follow Oct 29, 2018 · 4 min read

Written by Gabriel Yeh

Summary: an experienced trader presents profiting strategies using moving averages that can be used in both bullish and bearish markets.

This article will further discuss the usage of Moving Averages introduced in the last article.

The strategy used in this article employs the following 4 Moving Averages：

EMA(13) in red

EMA(55) in purple

EMA(233) in blue

EMA(843) in black

1. Trend following

What is “trend following”?

When all the MAs are sequentially placed a trend can be identified, traders are advised not to trade against the market such as buying the dip or shorting the rally, but to enter when the trend correction ends.

How to follow a bullish trend?

As the picture shows, when the MAs are placed sequentially and start diverging, a strong bullish market can be detected. Traders should wait for a retracement, and buy when the price goes above EMA13. The following picture gives an example of an entry position for a chased bullish market.

How to follow a bearish trend?

The previous paragraph explained how to follow a bullish trend using MAs, the next paragraph will conversely explain how to use the same MAs when following a bearish market.

As the picture shows, the MAs are placed sequentially and all indicate a downward trend, thus indicating a strong bearish market. Traders are advised to wait for an upward correction and short when the price falls below EMA13, just like the following picture shows.

2. What is the profit/loss ratio?

Both previously discussed strategies are helpful but do not explain how to identify and set up good profit targets. Traders can adjust their exit strategy as their profit/loss ratio grows.

Profit/loss ratios refer to the balance between profit and loss. For example, if a trader set a stop loss at USD 200 and his profit grows to 200USD, the profit/loss ratio would be at 1:1. The trader could then move the stop loss to a level slightly higher than his entry point to be sure to have made at least some profit on that position. If the profit grows by another USD 400, the profit/loss ratio would now at 2:1. The trader should then move the stop loss to a level that guarantees a 1:1 profit/loss ratio and keep a USD 200 profit. Thus, the more momentum the market has, the more profit the trader can keep.

3. Reversal opportunities

Reversals are by far one of the most attractive trading opportunities. They present traders with a clear target, a narrow stop loss, and a lucrative profit/loss ratio. They are more frequent and maneuverable than trend following opportunities.

Spotting a reversal opportunity

In a bullish retracement, if EMA13 crosses, and holds, above EMA55, then the price is likely to continue going up. This can be seen as a reversal opportunity with a profit target at EMA233, or even EMA843 if the uptrend is bullish enough.

In a bearish retracement, if EMA13 crosses, and holds, below EMA55, then the price is likely to continue going down. This can be seen as a reversal opportunity with a profit target at EMA233, or even EMA843 if the uptrend is bearish enough.

Conclusion

The two strategies discussed above are based on years of personal experience studying EMA. Read more from traders with experience, observe the markets, and practice on simulations before entering a trade. Remember to follow trading rules and manage your risks properly. Trading cryptocurrencies involves high risk, please assess risk before trading. Thanks for your reading, and stay tuned for more articles.

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