Looking for another KISS (Keep It Simple Stupid) strategy?
In our previous KISS article we looked at using RSI (Relative Strength Indicator) as a useful indicator to determine when to enter a position across multiple instruments.
As we stated, sharp sudden price movements can cause the RSI to spike up and down leading to potentially false readings. That said, with time, experience and patience, RSI can be an effective simple strategy to follow.
In the same vein there is another simple trading strategy that utilises Simple Moving Averages (SMA’s).
So what is a SMA? Simply put it is an average calculated by adding the previous closing price of an instrument over a number of time periods and then dividing this total by the number of time periods. Or, put another way, a 20 day moving average is the 20 day sum of closing prices divided by 20.
It is important to note that SMA’s do not predict price direction but help define the current direction with a delay (because they are based on previous prices).
So how does an SMA trading strategy work?
Firstly you will need to set up 2 individual SMA’s on a chart. For simplicity plot a 20 SMA and a 50 SMA on your chart (make sure you differentiate them with a colour).
Now, when the 20 SMA crosses over the 50 SMA you would buy/sell the first close
You now wait for the first retracement (pullback) into the 50 SMA and buy/sell the break of the high/low.
It should be noted that by varying the time frame you can trade both short and long term strategies
To make it easier take a look at the following instruments where the above trading strategy can be demonstrated:
NB: Orange is the 20 SMA and Aqua is the 50 SMA
#tradesafely #doublehit #fxzoo