In this post we are going to cover how to use the ZScore Indicator Suite to create a Moving Average Crossover strategy that will get you into trades when prices are trending AND will prevent you from getting into trades when prices are ranging which is usually a major flaw of most Moving Average Crossover strategies.
One of the unique features of our ZScore Indicator Suite is the ability to calculate the ZScore not only of Price but of an X period Average in relation to another X period average.
Within the indicator settings, you will choose the ZScore Method “Average.” In the example below we will use a 20 Period Average as our fast Moving Average and a 50 Period average as our slow Moving Average
For visual purposes, we added both moving averages (20 & 50) to the chart as well. As you can see below, the moment the fast moving average crosses over the slow moving average is the exact moment the ZScore Indicator crosses over the zero line, indicating the 20 period average has crossed over the mean, which in this case it is the 50 period moving average.
An additional trick that can be done with our indicator to help you enter the trade a bit sooner and therefore earn you more pips is to add another ZScore Indicator but this time in “Classic” mode and keeping the main or slow average on period 50. So what does that do you may be asking?
As you see below on the second indicator, the zero line crossing represents the moment when Price itself has crossed over the 50 period moving average which as you can see it gives you an earlier entry and thus more money in your pocket! However it is important to mention and or recognize that although it did play out well this time, it may not in other times. The best approach with this strategy is to split your position size in half. Entering half of the position at the crossing of Price and the other half at the crossing of the average.
That being said, personally I wouldn’t have entered this trade at any of those two entries. Why?
Lack of Volume at time of signal, indicated by our ZScore Indicator in “Volume” mode which tells me Volume is below average for that period. Without Volume there is very little chance price will be able to stay above the average. Sure enough, we could have earned some pips but to me it is not worth the risk.
If we zoom out on this chart…as we see below, we can see how many false signals we were able to stay out of due to lack of volume and how strong of a signal we got to go Short when the Volume increased and the average crossed below zero.
If you haven’t read my article on Volume The Fuel Of Price I highly recommend you do. Price action can be ignored if Volume is present but never the other way around.
Here is another example in the past of false crossover signals that were prevented by lack of Volume at time of signal followed by a signal to go short supported by increased of Volume.
Lower & Multi Time Frames
If you prefer trading at lower Time Frames, another ideal filter would be a ZScore Indicator in Classic Mode, but with a Daily TimeFrame setting and a Period of 20 as you see below.
These filter will give you a quick visual of the overall trend and help prevent you from entering trades against the trend. Below is the Daily filter set on a M1 chart, indicating you to ONLY enter Long trades in order to trade in the direction of the stablished trend.
34 Moving Averages Calculations To Choose From!
It is worth mentioning that there are plenty of optional types of moving averages to choose from within the Indicator settings. Hull Moving Average Crossover? No problem! Double Exponential Moving Average Crossover? No problem!
Automated Strategy ~ Forex EA
For those who are interested in automation, we have a Moving Average Crossover Expert Advisor available for rent for the MT5 platform at MQL
It is filled with features and best of all, it is 100% automated.
I hope you enjoy this article on how to use the ZScore Indicator Suite to create profitable Moving Average Crossover strategies. If you have any question, feel free to ask in the comments.