5 and 10 Simple Moving Average Trading Strategies

 

Discover the 5 and 10 Simple Moving Average Trading Strategies.

To be a successful trading strategy, almost every simple moving average trading strategy requires a solid trending market.

Moving averages become completely worthless whenever a trading chart begins to show consolidating price activity, yet moving averages converging might help you objectively identify a market in chop.

Trading tactics that take advantage of consolidations include trading the range or using a breakout trading strategy.

 Understanding multiple ways of technical analysis to detect good range trading situations is something traders should learn so that they do not get caught up trading consolidations when they believe they are trading a trending market.

This moving average trading strategy will be used to trade pullbacks in a trending market, and it will be combined with measurements of:

The tenacity of the trend in which we are trading

You may apply this trading strategy in Forex or other markets as a day trading approach, swing trading, or even position trading if the price is either oversold or overbought.

The difference Between Simple Moving Averages and Others

In actuality, the variations between different types of moving averages will not enhance a trading strategy in any meaningful way. We are, of course, using simple moving averages, and by using the SMA, we are simply using the price average over the last X days.

Although the significance of prior price data decays with time, exponential moving averages take into consideration more data than the timeframe utilised.

Let us keep it simple and stick to the SMA.

Time frames - While smaller time frames, such as 5 minute charts, may be used, larger time frames (4 hours – daily chart) are my preferred time frames for trading Forex.

Currency — Any currency pair, but stick to currency pairings that move, such as EURJPY, EURUSD, and GBPUSD.

Indicators: 5 and 10 simple moving averages (SMA), stochastic oscillator 14,3,3, and RSI set to 9

For oversold and overbought markets, we use stochastic at 80/20.

RSI (relative strength index) - A trend strength measure.

Moving Averages for Trend Determination

The 5 SMA is a quick moving average, and we will combine it with the somewhat slower 10 period SMA. We will assume we are in an upswing when the 5 crosses the 10 to the upside.

Assume we are in a downtrend when the 5 crosses below the 10 simple moving average.

This is a good objective approach to measure the trend, but as with any technical indicator, there will be a lag between price movement and the signal indicating a trend shift.

Also Read: Forex Scalping Strategy of 50 Pips Per Day

Trading Strategy Guidelines

You must follow the guidelines, like with any trading strategy, or you will not have much success. Even better, make a trading strategy that governs every move you will make in the markets.

Let us look at how a sell signal will show on the chart and how you will trade it.

The first thing we look for is a crossing of the 5 period simple moving average over the 10 period SMA to the downside.

Examine the RSI to check whether it is crossing or has crossed the 50 mark, indicating that momentum is to the downside.

Is the stochastic out of the overbought zone, or is it still in the process of going downward?

If all of the above conditions are met, place a sell stop order below the low of the candlestick that turned the moving averages.

That is how you will identify a short trade, and before you trade the sell signal, ensure sure you know where you will exit if you are incorrect. We shall talk about stop loss positions later. The candlestick shown as the setup candlestick may or may not have been the one that really turned the moving averages.

Remember that moving averages are lagging indicators, and the next one may have shown a definite turn.

Also Read: Consolidations And Pullbacks Trading Strategy

A buying signal is the inverse of a sell signal.

The moving averages have crossed over, and the 5 period SMA is now higher than the 10 period SMA.

The relative strength index has already crossed the 50-point mark, suggesting an upward trend.

Stochastic has crossed from oversold to overbought and is now moving higher.

A buy stop order is set above the high of the candlestick that turned the moving averages to cross.

The only difference between a sale signal and a purchase signal is the direction in which the indicators must show.

Simple Moving Average Trading Strategy Stop Loss

I do not believe in using a fixed number of pips as a stop loss. You have many options for implementing a protective stop loss:

Use the setup candlestick's high or low and place your stop below (above) that candlestick. This is dynamic since each candlestick will have a new price range.

To place your stop loss, use the average true range. In another blog article, I discussed this and other stop loss placement approaches.

Whatever approach you employ, the important thing is to remain consistent with all of your trading settings. This is why you need a trading strategy to ensure you on track.

Profitable Strategies

Taking gains, like setting stop losses, is not a one-size-fits-all proposition.

You may read this article, Let Profits Run, to learn how to take full benefit of what the market has to offer rather than just a few pips.

Some traders would target different levels of support or resistance to terminate their trade. You can get a support and resistance indicator for Meta trader here.

Price Targets Using Fibonacci

Fibonacci extensions are one of my favourite methods for determining profit objectives for any strategy, including a moving average trading strategy.

As seen in the chart, price reached all three goals, including the high at the 200 percent level measured from the preceding swing.

I am thinking about taking an article on how to utilize Fibonacci to take gains. I find it really handy since the different tiers also serve as regions to scale out partial income.

As you can see, this is a simple moving average trading strategy that considers trend and momentum when generating trading signals.

Ensure sure you apply adequate stop losses and risk management, and that you find strategies to grab what the market has to give without offering out of your trades.