3 Moving Average Crossover Strategy

One of the first forex strategies that I used when I began trading many years ago was the moving average crossover. It seemed that because so many traders were using it, it would have a self-fulfilling prophecy.

However, I soon discovered that the markets are not always trending which meant that trading the double moving average crossover would generate as many bad signals as it did good signals. That is when I thought about adding an additional filter to create a 3 moving average crossover strategy.

It turns out, I wasn’t the only one who had done this as it was already a popular forex system used by many professional traders. If you are looking for a simple moving average strategy, read on to discover just how easy it is to trade this way.

What is a moving average?

A moving average is perhaps the most popular technical indicator that is used for identifying market trends. With a moving average on your chart, you can see if the market is going up, going down, or stuck in a range. There is an old saying that “the trend is your friend” – which implies that by trading in the direction of the trend, you can increase your probabilities of success. Hence, many forex traders will use a simple moving average no matter what currency pair, chart timeframe or trading strategy they are using. If there was one technical indicator that a trader couldn’t go without, chances are it would be this one.

What is a moving average crossover?

A moving average isn’t used to just spot a trend, it can also be used to determine entry and exit points into the market when two or more moving averages cross. Some traders would enter as soon as they cross, others would wait for them to cross and for price to close above them all for confirmation.

E.g. If a short-term moving average crossed a longer-term moving average in a downward direction, this might be considered a sell trade. If the short-term moving average crossed the long-term moving average in an upward direction, this might be considered a buy trade.

I have traded moving average crossovers in the past and feel like using multiple moving averages can help to filter false signals but it does also mean that you might get into a position later than you would if using one moving average.

How to trade the triple moving average crossover

A moving average crossover strategy uses at least 2 moving averages, but you can further filter trades with another one to create the 3 moving average strategy. You are simply looking for 3 of the moving averages to show price is heading in the same direction.

As mentioned above, you could wait for price to close above the 3 moving averages for a buy trade or below them for a sell trade. I think it is better to wait for a pullback of price to the first moving average before considering a position. This can help avoid getting whipsawed in and out of ranging markets.

Triple moving average sell signal

  • All three moving averages are crossing in a downwards direction
  • Price has closes below all three moving averages (optional)
  • Wait for price to pullback towards the moving averages (optional)
3 Moving Average Crossover Strategy Sell Signal
3 Moving Average Crossover Strategy Sell Signal

Triple moving average buy signal

  • All three moving averages are crossing in an upwards direction
  • Price has closes above all three moving averages (optional)
  • Wait for price to pullback towards the moving averages (optional)
3 Moving Average Crossover Strategy Buy Signal
3 Moving Average Crossover Strategy Buy Signal

What are the best 3 moving average crossover settings?

Traders and market analysts commonly use several periods in creating moving averages to plot their charts. For identifying significant, long-term support and resistance levels and overall trends, the 50-day, 100-day and 200-day moving averages are the most common.

The longer the period you have set on your moving averages, the less trading signals you will get. However, this can be a good way to filter out ranging markets where there will be too many false setups.

If you use shorter periods for each of the moving averages, you will have more buy and sell opportunities but they will probably be less reliable. This is because the 3 moving averages will be crossing over more frequently and thus be more susceptible to market noise.

Which timeframe is best for the 3 moving average crossover?

The 1-hour charts and above are my preferred timeframes for trading 3 moving average crossovers, simply because they do not give as many false signals as the lower timeframes can. However, you can use any chart timeframe for trading the triple moving average crossover. Generally speaking, the lower the chart timeframe and moving average periods, the more trading signals you will receive.

Advantages of trading the 3 moving average crossover

  • Easy to setup and trade
  • Trading with the trend
  • Can catch some big moves
  • Can work on any currency pair and timeframe

Disadvantages of trading the 3 moving average crossover

  • Confusion over which moving average periods to use
  • Lots of false signals if used without additional confirmation
  • You need to know how to time the entry
  • Requires sensible money management

Conclusion: does the triple moving average crossover work?

Yes, the 3 moving average strategy does work and is one of the easiest ways to trade forex. However, it is not just a matter of taking every single moving average crossover as an entry or exit signal. It will require you to confirm trades with other forms of market analysis, including price action analysis and fundamental analysis. You will also need to have good money management and trading discipline in place to get the most out of your trades.