Triple moving average crossover is a moving average crossover strategy that employs three moving averages rather than two to provide long or short signals. Since they help to better understand the state of the market and the price structure, moving averages have long been linked to efficient trend following and price action.
To understand how moving averages help traders identify trading opportunities, it is necessary to first understand the concepts of price averaging and simple moving averages.
Table of Contents
- What is Moving Average?
- SMA (Simple Moving Average) & EMA (Exponential Moving Average)
- Applications of Moving Averages
- Triple Moving Average
- Triple Moving Average Crossover For Buy and Sell Signal
- Other Applications of Triple Moving Average
- Downside of Triple Moving Average Crossover
What is Moving Average?
The moving average is the average price of a security over a given time period.
A “simple” moving average is calculated by adding the security’s prices for the most recent “n” time periods and then dividing by “n.” For example, adding the price of a stock for 9 days and then dividing it by 9 yields the stock’s 9-day moving average.
Moving averages serve as a reference point for traders’ expectations; if the price of a security is higher than the previous n period moving average, investors’ or traders’ expectations for the stock are said to be high; if the price is lower than the moving average, investors’ or traders’ expectations are said to be low.
When prices cross moving averages from below, investors get a buy signal, and when prices cross moving averages from above, they get a sell signal.
SMA (Simple Moving Average) & EMA (Exponential Moving Average)
The simplest type of moving average is the simple moving average, which is calculated by dividing the sum of prices by the number of periods.
For lookback period of N simple moving average can be calculated as below-
SMA Over N periods = ∑ (Closing periods over N periods) / N
The weighting factor for each period is equal, with each price having an equal impact on the average value. The percentage of influence or contribution that each period has on the SMA is (100/N).
The exponential moving average is a front-weighted moving average that emphasizes recent prices and is calculated by multiplying the latest closing price by an exponential weighting ratio of X and adding this to (1 − X ) of rolling average.
EMA = Closing price x multiplier + EMA (previous day) x (1-multiplier)
Applications of Moving Averages
Moving averages are widely used in financial markets, their applications vary a lot depending upon the system and trading setup, however basic applications of moving averages are as follows –
- Moving averages work as dynamic support and resistance levels, help traders to find areas of dynamic support and resistance levels as extra confluence factors during price analysis.
- Moving averages act as price filters, price above or below moving average gives clue about price strength.
- As oscillators they are useful to find out oversold and overbought regions in charts
- Helps in formation of price bands as reference or median of range.
- As moving average crossovers to give entry and exit signals.
- Moving averages are very helpful to identify trends and strength of major trends.
- They also give ideas of trend reversals.
- To gain insights of bullishness and bearishness of market.
Triple Moving Average
Extending the use of the double moving average, the triple moving average provides additional information about market conditions. The triple moving average incorporates three types of moving averages.
- Short Term Moving Average
Short term moving averages are more reactive to price changes , since they use less periodicity for calculating average they act fast to the changes in price action, short term moving averages are also called fast length moving averages.
Examples of short term moving averages are 9 day and 25 day moving average
- Medium Term Moving Average
Because medium-term moving averages are less reactive than fast-term moving averages, they are used in conjunction with short-term moving averages to form a moving average crossover strategy.
The 50-day moving average is regarded as a good medium-term moving average.
- Long Term Moving Average
Long term moving averages are slow moving averages, they are slow to react to price changes, often are indicative of long term trends in the market. They are used in the triple moving average crossover strategy by investors for long-term trend reversals.
Examples of long term moving averages are 100 day and 200 day moving averages.
Triple Moving Average Crossover For Buy and Sell Signal
Moving averages have long been known to provide reliable signals for entry and exit during trending markets. Triple moving average crossover employs the price action trading principle of strength and price structure to provide entry and exit signals.
In triple moving average crossover strategy short term moving average crossover is used to generate buy and sell signals. Short term moving average can be 9 day or 12 day moving average.
A buy signal is triggered when the 25-day moving average crosses the 100-day moving average from below, and it is confirmed when the 25-day moving average also crosses and prices close above the 50-day moving average.
When the 25 day moving average or fast length crosses the 100 day moving average from above, a sell signal is triggered and confirmed when the 25 day moving average also falls below the 50 day moving average.
To exit the trades in triple moving average crossover, simply wait for the short term moving average to cross once below (in the case of a long position) and once above (in the case of a short position).
Other Applications of Triple Moving Average
Triple moving Averages are used in following ways by price action traders –
- Triple moving averages work as excellent trend identifiers, if all three moving averages point to the same direction as the existing trend , traders can take positions in the direction of trend.
- Slope of the moving averages especially the medium term and long term moving average tells about the strength of a trend.
- Degree of separation between moving average also act as an indicator of strength in ongoing trend.
- All three moving averages function as dynamic support and resistance levels, with the strength of support and resistance increasing from short to longer term moving averages.
Downside of Triple Moving Average Crossover
Many people have tried and failed to develop a successful fail proof strategy using multiple moving averages. Being a price action trader necessitates rigorous back-testing to the hypothesis and results that back up the research; with triple moving average crossover, you will always encounter the following difficulties. –
- Being used as trend following setup triple moving average crossover fails miserably during choppy markets.
- Moving averages make it nearly impossible for traders to enter early in a trend and exit before it reverses. Prices always lead the way, regardless of how short or long the lookback period is.
- It is difficult to manage risk while using only moving average crossovers, risk to reward is not very good and often traders end up placing large stop loss which hurt the performance in long run.
