The 21-period moving average can do a good job of spotting market trends in currency pairs. It can be used to gauge whether we will be looking to go short (sell) or long (buy). We can then use additional technical indicators, fundamental analysis and price action analysis to time our entry in line with the overall trend. Most forex traders will use at least one moving average to determine currency trends, whilst some will include additional short term and long term moving averages for further confirmation.
What is the 21-period moving average?
The moving average is one of the most popular indicators used in chart analysis and its main purpose is to identify the direction of a trend and also define potential support and resistance levels.
The 21-period moving average is in the sweet spot of not being too short and not being too long. It is therefore not too sensitive to price movements whilst not as lagging as more longer term moving averages such as the 100 moving average.
To calculate a 21-day moving average, the closing prices of the last 21 days are added up and the total is divided by 21. We perform the same calculation with each new trading day forward. Each time, only the prices of the last 21 days are used in the calculation. This is why it is called a moving average.
How to trade the 21 moving average forex strategy?
We will be using the 21 simple moving average (21 SMA) to identify if there is a clear bullish markets (uptrend) or bearish market (downtrend). Once that has been established, we will look to enter the trend on a SMA pullback or SMA breakout. This can help to ensure that we do not end up entering a sell trade at the bottom of a trend or a buy trade at the top of the trend.
- Price is above 21 moving average
- ADX +DI is above the ADX -DI
- ADX main line is above 20
- Price has breached recent resistance level
- Bullish price action
In the GBP/USD 1-hour chart below, you can see that all of the above conditions were met. The price is below the 21-period SMA and has broken through a recent resistance level which eventually turns into a support level. The ADX is showing uptrend momentum as the +DI is above the -DI and the ADX value is greater than 20. The entry is confirmed with bullish doji candlesticks and morning stars. We could have placed the stop loss just below the 21 SMA which would have been around 20 pips. This uptrend went on for around 380 pips which gave ample opportunities to exit the trade with a good risk to reward ratio.
- Price is below 21 moving average
- ADX -DI is above the ADX +DI
- ADX main line is above 20
- Price has breached recent support level
- Bearish price action
You can see from the GBP/USD 1-hour chart below that the price is below the 21 SMA and it has just broken through a significant support level. The ADX crossover has occurred with the -DI crossing the +DI which suggest a downwards trend. The trend momentum is confirmed as the ADX indicator is above 20. We have some bearish candlestick patterns including hammers and shooting stars. We could have placed the stop loss just above the 21 SMA which would have been around 40 pips. That’s not bad considering this downtrend went on for over 800 pips.
21 moving average forex trading strategy settings
In theory, you can use the 21 SMA strategy on any currency pair or chart timeframe. Personally, I would prefer to trade major currency pairs such as the EUR/USD and GBP/USD. This is because they tend to have some of the largest trading volume which means plenty of liquidity and the potential to catch some big market moves.
In terms of currency chart timeframes, I think the 1-hour charts and above are better for trend trading strategies in my experience. This is because they can help to filter out some of the market noise that you get on the lower chart timeframes like the 5-minute charts. It also means that you need to spend less time analysing charts and looking for trading signals. You can always confirm signals on multiple timeframes to ensure the overall market sentiment is the same.
21 moving average strategy Pros & Cons
- Enter some big market trends
- Can be used on any currency pair
- Can be used on any chart timeframe
- Combine with any other indicators
- Short/long term trading signals
- Need to try and filter false signals
- Can be sensitive to market noise
- Requires excellent money management
Conclusion: is the 21 moving average strategy any good?
Yes, the 21-day moving average is one of the most popular technical indicators used by forex traders. With so many traders watching it, you will often see that price does react around the 20 SMA price level. The 50 moving average and 200 moving average are 2 of the other popular moving averages which can be good for extra confirmation on trends.
The results you see are highly likely to depend on the forex money management that you use. I have seen different traders using the same forex strategy get a completely different set of results simply because of the take profit and stop loss they were using. I would want to cut my losing trades short and let winning trades run. I might use a break even to lock in good trades and a trailing stop loss to maximise each move. It can be frustrating to have one bad trade wipe out many winners.
You could always practice trading the 21 moving average forex strategy on a demo account to begin with and see how things go. This can be a good way to master your trading skills and build some confidence without needing to take any risk. You can get a free forex demo account from most forex brokers. Once you start seeing some consistent results, you could always make the switch to a live account if you feel ready to do so.
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