It is one thing that really struggles traders most. It’s about being out when they should stay or when to enter in order not to miss another trading opportunity. Fright over the lost profits will just drive one to go through hasty decisions which ultimately can bring about terrible loss in the trade, this dilemma occurs with a dilemma between getting out of profitable move and staying too early and ending up missing yet more opportunities, thus increasing to a greater loss at last.
I recently learned a valuable lesson from a grizzled floor trader in Chicago. He told me it is absolutely necessary to know when to be in and out of the market: to understand its strength and weakness. He said this is essentially using a very simple moving average strategy.
In this article, we’re going to discuss an Easy Moving Average Trading Strategy that uses moving averages as the foundation for making confident trades. It will simplify the approach by focusing on price action and market dynamics without getting overwhelmed by complicated indicators or mere analysis.
About Moving Averages
Well, before venturing into the strategy, let’s understand what moving averages are and why they constitute such a big part of a trading plan. Moving average smooths price data over a period, allowing a viewer to see better through the noise of market and see the overall direction of the trend.
SMA: Simple moving average computes an average price depending on the average number of periods provided. An excellent example would be the fact that if there’s a need to find out the 50-period moving average, that simply adds up the last fifty closing prices then divides them by fifty.
EMA: Exponential moving average puts weight to more recent prices thereby is sensitive to recent data. In many cases, it proved more appropriate especially during very rapidly moving markets.
Elementary Components of Easy Moving Average Strategy
- Identifying Market Strength and Weakness
The foundation of the Easy Moving Average Trading Strategy is the identification of market strength and weakness. As taught by the floor trader, we are supposed to:- Stay in a trade as long as the market displays strength: This means looking for upward moves with good buying interest.
- Exit when weakness is evident: Weakness may be depicted by a price retracement. This may be an indication of the reversal or slowing down of the trend.
- 50 SMA and 15 EMA
For our strategy, we are going to focus on two moving averages: the 50-period Simple Moving Average (SMA) and the 15-period Exponential Moving Average (EMA). Here’s how you can use them appropriately:- 50 SMA: This is a lagging indicator. This helps us to realize the overall trend. When the price is above the 50 SMA, it’s a bullish trend. Conversely, when price is below, it’s a bearish trend.
- 15 EMA: This more aggressive moving average acts as a line in the sand to determine when retracements are weak in a downtrend. If price retreats to this line and does not break through, then it shows that the trend is firmly bearish.
Implementing the Strategy
Having laid down the groundwork for you, let’s step through how to apply the Easy Moving Average Trading Strategy.
Step 1: Set Up Your Chart
Begin by plotting the following onto your trading chart:
- 50-period SMA (typically graphed as a blue line)
- 15-period EMA (often graphed as a red line)
You want to view the chart at a timeframe that best suits you. If you are a day trader you want to be looking on the daily, hourly or even minute charts.
Step 2: Identify the Trend
Observe the way the price behaves towards the 50 SMA.
- Bullish Trend: Buy when the price is persistently above the 50 SMA.
- Bearish Trend: Sell short when the price is persistently below the 50 SMA.
Step 3: Entry Points
We now determine entry points based on how the price interacts with the 15 EMA and market strength:
- For Long Trades: Wait for it to retrace all the way back to the 15 EMA when uptrending. If price re-bounces off that point and continues to trade further upwards, then you get strength. Go long since price breaks above 15 EMA.
- For Short Trades: On a downtrend, wait for the price to go to the 15 EMA. If it cannot break above and proceeds moving down, it manifests weakness. You ought to get into the trade upon the price going below the 15 EMA.
Step 4: Trade Management
Trade management pertains to how one ensures that profits are maximized and losses are minimized.
- Stop-Loss Orders: You must use stop-loss orders all the time for capital protection. For a long trade, place your stop below the most recent swing low; for a short trade, place it above the swing high.
- Profit Targets: Set proper profit targets based on price action. Generally, you’re looking for a risk-reward ratio of at least 1:2.
Step 5: Monitor for Exits
With management of your trades, closely follow the price action compared to the moving averages, thus:
- Exiting the Long Trades: If you are on a long position, breaking below 15 EMA, such a signal denotes strength, and you should start exiting.
- Exiting Short Trades: Conversely, when you are on a short position, and the price breaks above the 15 EMA, it signifies strength in the opposite direction, hence an opportunity for exit.
Ignoring the Trend
The trade always must be based on the direction of the trend shown by the 50 SMA. One runs the risk of losing all the positions involved in a counter-trend.
- Overtrading: One must learn to choose and to be patient in waiting for more concrete signs rather than taking advantage of every retraction.
- Lack of Discipline: Disciplines in trading will manifest if there is commitment to one’s predetermined plan. For example, in this trading plan, using stop-loss and profit target will govern emotions.
Conclusion
The Easy Moving Average Trading Strategy is simple and efficient because it has an exit from all the complexity while trading. You understand the strengths and weaknesses of the markets and use a 50 SMA and a 15 EMA that enables you to make choices on various issues and thus increases your chances of winning while trading.
Implement this strategy today and see the transformation in your trading style. Trading does not need to be complicated. Enter and exit trades with a great deal of confidence to maximize your potential for gains.