The Ultimate Moving Average Strategy You’ll Ever Need (Complete Guide)

How to Use Moving Averages as Stop Loss for More Effective Trailing Stops

Stop loss orders are an essential tool in trading as they help limit potential losses and protect profits. One popular method of setting stop losses is by using moving averages. In this article, we will explore how to effectively use moving averages as stop losses to build more effective trailing stops, which can help traders keep their profits and achieve bigger trades.

Understanding Moving Averages

Moving averages are technical indicators that help smooth out price data and identify trends. They are calculated by averaging the prices of an asset over a specific period of time. In this strategy, we will focus on two moving averages: the 20-period exponential moving average (EMA) and the 9-period simple moving average (SMA).

To add these moving averages to your trading platform, go to “Insert Indicators” and select “Trend,” then “Moving Average.” Set the first moving average to the 20-period EMA and make it slightly thicker for better visibility. The second moving average should be the 9-period SMA, which will hug the top of the candlestick.

Using Moving Averages as Trailing Stops

When using moving averages as trailing stops, it is important to identify a trending market. This strategy works best when the market is trending, as it helps traders stay in profitable trades and avoid choppy, sideways markets.

Let’s consider an example where we enter a trade based on a trendline break. Once we enter the trade, we place our stop loss below the candles. As the price continues to move in our favor, we can observe that the moving averages act as support and resistance levels.

When the price crosses below the moving averages, it signals a potential exit point. By using this strategy, we can exit the trade and secure our profits. In the example given, we would have achieved a 45-pip profit on a 15-minute trade.

It is important to note that when the market is choppy and lacks a clear trend, this strategy may not be as effective. Therefore, it is crucial to ensure that the market is trending before implementing this strategy.

Managing Trailing Stops with Moving Averages

To effectively manage trailing stops using moving averages, there are several techniques you can employ:

1. Moving Stop Loss Below Fractals:

Fractals are technical indicators that help identify potential reversal points in the market. When the price hits a new fractal, you can move your stop loss below it. This allows you to lock in profits and protect against potential reversals.

2. Tightening Stop Loss Under Each Candle:

Another method is to tighten your stop loss under each candle as it forms. Since candles act as resistance levels, moving your stop loss below each candle helps protect profits and minimize losses.

3. Moving Stop Loss to Break Even:

When the trade starts moving in your favor and you have achieved a certain level of profit, you can move your stop loss to break even. This ensures that even if the trade reverses, you will not incur any losses.

It is important to find a balance between giving your trades room to run and protecting your profits. By using these techniques, you can effectively manage your trailing stops and maximize your trading results.

Using Moving Averages as Safety Nets for Stop Losses

In addition to trailing stops, moving averages can also act as safety nets for stop losses. When trading reversals, stop losses can be relatively large. By using the 9-period moving average as a reference, you can set tighter stop losses and limit potential losses.

For example, if you enter a short trade and the price moves against you, you can exit the trade once it crosses back above the moving average. This allows you to minimize losses and keep them smaller compared to using wider stop losses.

By using moving averages as safety nets for stop losses, you can effectively manage risk and protect your trading capital.

Frequently Asked Questions (FAQs)

1. How do moving averages help in setting stop losses?

Moving averages help in setting stop losses by acting as support and resistance levels. When the price crosses below the moving averages, it signals a potential exit point, allowing traders to secure profits and limit losses.

2. Can moving averages be used in all market conditions?

Moving averages work best in trending markets. In choppy or sideways markets, they may not be as effective. Therefore, it is important to identify a clear trend before implementing this strategy.

3. How can moving averages be used as safety nets for stop losses?

By using moving averages as reference points, traders can set tighter stop losses when trading reversals. This helps limit potential losses and protect trading capital.

4. What are some techniques for managing trailing stops with moving averages?

Some techniques for managing trailing stops with moving averages include moving stop losses below fractals, tightening stop losses under each candle, and moving stop losses to break even once a certain level of profit is achieved.

5. How can traders balance giving trades room to run and protecting profits?

Traders can find a balance by using techniques such as moving stop losses to break even and tightening stop losses under each candle. This allows them to protect profits while still giving trades room to potentially achieve larger gains.

By implementing these strategies and techniques, traders can effectively use moving averages as stop losses to build more effective trailing stops. This can help them protect profits, limit losses, and achieve bigger trades in the market.