Moving averages are arguably the most popular indicators in the trading industry, and that’s for good reasons. They can act as dynamic support and resistance levels while also giving clues about the current market trend and momentum.
So, if a single moving average can be this effective, what about having three of them on a chart? That’s even more effective. This is where the 3 moving average crossover strategy can be a game-changer for you.
- Triple Moving Average Crossover (3 EMA Crossover) is a popular trading strategy that uses three Exponential Moving Averages (EMAs) to analyze market trends.
- It provides clear signals for identifying uptrends and downtrends based on the relative positioning and crossovers of short-term, medium-term, and long-term EMAs.
- The strategy’s effectiveness is attributed to the confirmation provided by all three EMAs, which offer strong bullish and bearish signals for entry and exit points.
- The recommended EMA combination is the 9-day, 21-day, and 55-day EMAs, which balance short-term and long-term trend identification.
In this article, we will get you started on the right way to incorporate this simple and effective trading strategy into your plans.
- What is the 3 Moving Average Crossover?
- Why is the Triple Moving Average Crossover an Effective Strategy?
- The Triple Moving Average Crossover – Different Variations and Types
- Best Settings for the 3 Moving Average Crossover Strategy
- The Triple Moving Average Crossover Strategy – Trade Example
- The Bottom Line
- Frequently Asked Questions (FAQs)
What is the 3 Moving Average Crossover?
The 3 Moving Average Crossover strategy, also known as the Triple Moving Average Crossover, relies on the EMAs intersecting to provide insight into the current direction of a market’s trend. However, it’s essential to understand that this strategy doesn’t predict future trends but rather highlights ongoing ones.
Generally, simple moving averages and EMA crossovers of two periods occur when different EMA lines intersect. The key idea here is that the interaction of these lines can suggest the possibility of a trend change. This is particularly valuable for traders seeking to enter or exit positions at optimal moments.
The 3 EMA crossover strategy takes this concept a step further by using three EMA indicators with varying moving average periods. Unlike some other strategies, such as the Golden Cross, which focuses on short-term trends, the triple moving average strategy has a longer-term perspective.
As a result, it tends to be most effective in trending markets. Yet, since there are various options to utilize the 3 moving average crossover strategy, you can also set your settings for short-term trade opportunities, including scalping and intraday trading.
The choice of EMA settings you use while trading this strategy is completely up to you. For instance, one of the most popular EMA settings is using the 10, 30, and 50 EMAs. But there are other popular settings, including the 9, 21, and 55, or the 5, 8, and 13. These periods allow traders to analyze the position and movement of each EMA in relation to each other and the price action.
Interpreting EMA Crossovers
One of the fundamental aspects of the 3 EMA crossover strategy is understanding how to interpret the crossovers:
- When the price is above all EMAs, it signals an uptrend and rising momentum.
- Conversely, when the price is below all EMAs, it indicates a downtrend and falling momentum.
Yet, it’s not over here. Looking at the example of 10, 30, and 50 – The relative positioning of the 50 EMA in comparison to the 10 and 30 EMAs can provide additional insights.
For instance, crossing below the 50 EMA could signal a reversal from a longer-term uptrend to a downtrend. These EMAs crossovers are also used to identify entry and exit opportunities, but we’ll cover that later in the article.
Why is the Triple Moving Average Crossover an Effective Strategy?
One of the primary reasons the triple moving average crossover strategy is so effective is the use of three Exponential Moving Averages (EMAs). While many strategies rely on the crossover of just two simple moving averages (SMAs) or exponential moving averages (EMAs), the inclusion of a third EMA strengthens the confirmation signals. When all three EMAs cross each other, it provides a more compelling indication of market direction.
These three EMAs work in harmony to offer valuable context for price action. Traders can then assess how the price relates to the three EMA lines on the chart, allowing them to make precise analyses of their trading positions.
In addition to its confirmation capabilities, the triple moving average crossover strategy is a valuable tool for defining optimal entry and exit levels. This is achieved through the interaction of the three EMAs, each representing a different time frame.
So, for example, when the short-term EMA crosses above the long-term EMA, it signals a potential entry point. This crossover highlights a shift in short-term momentum that aligns with the longer-term trend, presenting a favorable trading opportunity.
The medium-term EMA plays a unique role in this strategy. It indicates a zone where mean reversion is possible, providing insight into when the price may return to the average price. Traders often use this EMA to trail their stop loss orders, maximizing their profit potential.
Now, as we all know, successful trading goes beyond entry and exit signals; it also demands effective risk management. The triple moving average crossover strategy excels in this aspect. The three EMAs, representing trend and momentum, can also aid in setting up risk management strategies.
Traders can implement stop losses, trailing stops, and profit targets with confidence, thanks to the insights provided by the EMAs. By comparing the direction and momentum of the short-term EMA to the long-term EMA, traders can confirm trend continuity.
So, all in all, there’s more than one reason why so many traders rely solely on the 3 moving average crossover strategy. It’s a simple-to-use yet effective strategy that has proven accurate and reliable by many traders. Still, before you apply the triple MA crossover strategy, we suggest you backtest the strategy on a demo account before you risk real money.
The Triple Moving Average Crossover – Different Variations and Types
Having explored the effectiveness of the triple moving average crossover strategy, let’s now dive into the different variations and types of this strategy. Understanding the unique characteristics of each combination will help you choose the most suitable approach for your trading objectives to find buy and sell signals.
Note that there are endless variations of the 3 moving average crossover strategy; however, here are the most popular combinations:
|Short MA||Medium MA||Long MA||Best For|
|5||8||13||Scalping and Intraday Trading|
|9||21||55||Capturing short to medium-term trends and countertrend trading|
|10||30||50||Trend following strategies|
Best Settings for the 3 Moving Average Crossover Strategy
While the best settings might be subjective to your trading style, the 9, 21, and 55 EMAs crossover has proven to be quite effective and, in this case, will be regarded as the best settings of all.
Here’s what it looks like on a price chart:
The core of this 3 moving average crossover strategy lies in the use of three exponential moving averages (EMAs), each with a distinct lookback period:
9-period Exponential Moving Average: Shown as the Green line in the image above, this EMA is your short-term moving average and plays a crucial role in identifying short-term trends. This slower-moving average frequently crosses over and under the 21-period EMA, providing opportunities for both trend-following and countertrend trading.
21-Period Exponential Moving Average: The 21-period EMA, represented as the Red line in the above chart, serves as a medium-term trend indicator. Its position in relation to the other EMAs helps determine the overall trend direction. When it’s below the 9 EMA and above the 55 EMA, it signals an uptrend. Conversely, when it’s above the 9 EMA and below the 55 EMA, it indicates a downtrend. It can also be used for stop-loss trailing purposes.
55-Period Exponential Moving Average: The 55-period EMA, shown as the White line in the above chart, functions as your long-term trend indicator. It helps establish the longer-term trend direction. When the 55 EMA is positioned below both the 9 and 21 EMAs, it suggests an uptrend. Conversely, when it’s above both the shorter-term EMAs, it signifies a downtrend.
Interpreting EMA Crossovers
Understanding how these EMAs interact with each other is crucial for implementing the strategy effectively. Let’s see what each crossover signals:
9 EMA Crossing Over the 21: If the 9 EMA crosses over the 21 EMA while already positioned above the 55 EMA, it’s a strong uptrend signal. This is an opportune time to look for buy trades.
9 EMA Crossing Below the 21: Conversely, if the 9 EMA crosses below the 21 EMA while already below the 55 EMA, it’s a clear sign of a downtrend. This is a favorable condition to explore sell trade opportunities.
It’s important to note that there will be instances where the 9 EMA frequently crosses over the 21-period EMA, potentially turning the short-term trend against the longer-term trend. This creates trading opportunities aligned with the shorter-term trend direction, even if it contradicts the longer-term trend.
In these scenarios, your trading plan should define precisely which trades to take. It’s crucial to have a clear trading plan that outlines your actions when such moving average crossovers occur. As such, selecting the right settings for your triple-moving average crossover strategy is a vital step in your trading journey. The choice of the lookback periods for each EMA influences your strategy’s ability to identify and act on market trends effectively.
The Triple Moving Average Crossover Strategy – Trade Example
In this section, we are going to be putting everything we have learned so far together and using it to analyze the chart. Although this is not an exhaustive way to trade the 3 moving average crossover strategy, these two strategies are part of the most effective methods of trading the strategy.
Trading Reversals with the Triple Moving Average Crossover Strategy
Trading reversals with the 3-moving average crossover strategy is not rocket science. To get started, you can simply add three different EMA combinations to your chart. Or, you can add any of the custom indicators on MetaTrader4/5 or TradingView and edit the settings according to your preference.
Note: Do not confuse the triple moving average crossover strategy with the triple exponential moving average (TEMA) indicator. With that said, let’s get to our strategy.
So, here, we will be using the 9, 21, and 55 EMA combination. And the first thing we pay attention to is trend reversal. From the NZD/USD chart below, you can see that the 9 and 21 EMAs are crossing below the 55 EMA, signifying that both the momentum and trend are reversing to the downside. This means that we will be looking to SELL the new trend.
After we’ve identified the trend reversal, what’s left is determining our entry points. Now, we will be using stop orders while trading this strategy. In a downtrend, all we have to do once the trend has been established is to identify the last swing low and place our sell stop below it. We want to see this range break for prices to continue further. Check this chart out:
Once your position has been opened, setting your stop loss should be as easy as shoving it below the last swing low before the trade if you’re in an uptrend. While in a downtrend, place it slightly above the swing high.
Note: Due to the lagging nature of the moving average, if the price has significantly moved past the swing points, use the Average True Range (ATR) indicator to find a more suitable position for your stop loss. Traders using this approach typically set the stop loss at 2x of the ATR Value.
Setting a target profit is straightforward. For a completely hands-off method, simply target 1R. That is, place your target profit at the same distance as your stop loss, but only on the opposite side. If you’re in a downtrend and your stop loss is 15 pips away to the upside, you place your target profit 15 pips away on the downside.
Alternatively, if you prefer to ride the trend for long, hoping for more profit, you can track the price movement and manually close your position when the price closes below the 21 EMA in an uptrend. Or, you can wait for the price to close above the 21 EMA if you are in a SELL trade.
Trading Continuations with the 3 Moving Average Strategy
There are times when the trend is already established, and you want to open your position in the same direction as the prevailing trend. In this type of market, price may temporarily retrace against the main trend, then give a new crossover of the EMAs and continue the trend. That’s an opportunity for you to join an existing trend. The following must be present before considering an entry:
- A crossover of the EMAs in the direction of the trend.
- A typical breakout is where we place our entry.
Here’s what it looks like on the chart:
As you can see, as the price retraces and corrects, a new crossover occurs. This should be your entry level. Now that you are in a trade, you can use the same risk management structure that we discussed in the first strategy.
The Bottom Line
The Triple Moving Average Crossover strategy is a versatile tool that excels not only in providing entry and exit signals but also in effective risk management. Traders can confidently implement stop losses, trailing stops, and profit targets, all while confirming trend continuity through the interaction of short-term and long-term EMAs. By offering a comprehensive perspective on price action, this strategy empowers traders to make well-informed decisions in trending markets.
The key to success with this strategy lies in selecting the right combination of EMA settings, with the 9, 21, and 55 EMAs being a proven and effective choice for many traders. These EMAs work in harmony to assess short-term, medium-term, and long-term trends, providing traders with a solid foundation for their trading plans.
Frequently Asked Questions
Here are some frequently asked questions on the Triple moving averages strategy.
How do you use 3 moving averages?
The use of 3 moving averages, such as the 9, 21, and 55 EMAs, involves observing their crossovers and relative positions. When the shorter-term EMAs (9 and 21) cross above the longer-term EMA (55), it signals an uptrend, while the opposite suggests a downtrend. These crossovers and positions help traders make informed decisions.
What is the best moving average crossover combination?
The combination of 9, 21, and 55 EMAs is a popular choice for a triple-moving average crossover strategy. It provides a balance between short-term and long-term trend identification. The best combination can vary depending on your trading style and the specific asset you are trading, so it’s essential to test different combinations to find what works for you.
Which 3 EMA strategy is best?
The “best” 3 EMA strategy depends on your trading goals and preferences. The 9, 21, and 55 EMA strategy is widely used and effective for many traders. However, there are various EMA combinations, and the best strategy is one that aligns with your trading objectives, risk tolerance, and market conditions. It’s advisable to backtest and experiment to find the strategy that suits you best.