Every beginner struggles to find a strategy that works for them. It takes a long time to find one that you truly understand.
Price action, as every trader will tell you, is king. So learn everything you can and comprehend the main logic behind it.
Meanwhile, if you want to make some quick money and are willing to take risks, you can try any indicator strategy with strict rules.
Moving averages
The moving average strategy was one of the very first indicator strategies I used.
When used correctly, the moving average is a very simple and more accurate indicator.
It is simply a measure of the price average over a specified period of time. But here as the price moves, the average will also update and will be displayed as a moving line. Hence the name moving average. This is also known as a simple moving average.
Types
There are many types of moving averages. But the simple and exponential are the most common one.
Simple moving average is the most basic one. It just calculates the averages. .
Exponential moving average puts more weight on the recent prices.
Other moving averages, such as dema and tema, calculates other factors in addition to calculating averages.
Whatever moving average you use, the strategy’s win rate will be roughly the same. As a result, you can freely mix and match your moving averages.
How to set up?
Now all you have to do is to..
1. Add the indicator moving average to the trading chart,
2. Select the type of moving average (eg. Ema),
3. Select the time period for which the averages should be calculated (Eg. 20).
You can also change other variables as and when required.
Now as soon as you hit enter you will see a line displayed on the chart and that will be your 20 ema.
You may include as many moving averages or other indicators as you wish. In this example, I’ll use 200 ema and 10 ema.
Strategy
There are numerous strategies available, with all possible moving average combinations such as
1. Single moving average breakout,
2. Moving averages crossover,
3. Moving average with other indicators,
4. Moving average with price action etc.
In this example, we’ll look at the second one: the moving averages crossover.
Plot three moving averages on the chart: the 200 ema, the 10 ema, and the 20 ema.
The most popular is 200 ema, which can tell you the overall trend at a glance. This is a very popular trend indicator.
If the price is above 200 ema, the stock is considered to be in the uptrend. If it is below 200 ema, it is considered as downtrend.
The 10 ema travels more closely with the price than the 20 ema, the 20 than the 200, and so on.
A crossing point of 10 ema and 20 ema is considered a signal for entry and exit.
If 10 ema crosses and moves above the 20 ema, it is considered as a buy signal.
If 10 ema crosses and moves below the 20 ema, it is considered as a sell signal.
*You can use 20 ema and 50 ema, or 50 and 200 ema, instead of 10 and 20 ema.
Rules
BUY
Condition : Price above 200 ema,
Entry : 10 ema crosses and moves above 20 ema,
Exit ( Both target & stop loss ) : 10 ema crosses and moves below 20 ema.
SHORT SELL
Condition : Price below 200 ema,
Entry : 10 ema crosses and moves below 20 ema,
Exit ( Both target & stop loss ) : 10 ema crosses and moves above 20 ema.
This is the basic strategy which when performed correctly can give you good results.
Example
As you can see in the above picture, 10 signals were plotted on the chart.
4 tiny boxes are small losses. 4 big ones are good profitable trades. 2 medium sized ones are may be breakevens or small profits.
Therefore, in a sample size of 10, we can say 40-60% of the trades are profitable.
So, we can safely say, the strategy’s win rate in this sample size is 50% with huge gains and small losses.
* Please backtest the strategy and do demo trades before using it in the live market.
Pros & Cons
PROS
Beginner-friendly.
What makes this moving average strategy almost always profitable is that the losses are always small and profits are huge. And that’s how any trading strategy should be.
No need to worry about your risk management strategy. It takes care of everything on it’s own : entry, target, stop loss, trailing stop loss.
CONS
As with any indicator, it generates signals based on past data.
If you do not use price action, you will not know the target or stop loss ahead of time. You will have to wait for the signal to enter or exit the trade.
You will have to accept looking at small pullbacks or even losses when using an indicator strategy because you cannot just set it up and forget it.
In a volatile market, you can have frequent or consecutive false signals. You can avoid this by having only 1 or 2 trades per day as your risk management rule.
Lessons learnt
1. Any strategy can do it’s best on higher timeframes. So use this strategy on a higher time frame to improve your accuracy.
2. As trading is just a probability game, the more constants you have, the more likely you are to succeed.
Eg. Trading on the same stock at the same time, with same settings, trading only on the 1st signal, only 1 trade per day rule etc. can give you higher probability of success.
3. For more confirmation, you can combine this with 3 other types of indicators like stochastics or macd for momentum, volume bars and Bollinger bands for volatility.
Or you can just combine with basic price action concepts like support and resistance.
4. It works the best on trending stocks. You can choose the top gainers, top losers or top volume stocks to increase your chance of success.
This is the 1 strategy any beginner can understand and learn easily and start seeing profits when done with proper risk management.
For more information on moving average and strategies, check out my youtube channel on trading.
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