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Moving averages are simplest and most used technical indicator. They are used for smooth the price movement. Moving averages are used like trend line, which adapts to price change, not only like standard trend line. MA trend line is used like support and resistance if we have clear trend.
In our strategy we recommend usage of 20 or 50 period moving averages. Strategy is fairly simple but to evade false signals we wait for price conformation. The bar, in which period signal is generated we will call it – signal bar. This strategy is based on trend following, so risk/reward ratio should be big. When we got fairly good profit we’ll close some part to guaranty some profit and the rest is for maximizing profits, by switching stop.
Rules for opening and closing position are especially simple:
For long position:
- We go for long (buy), when price breaks the highest value(high)of the bar, which broke 20 period MA (signal bar), from bottom to top. We place stop 3 or 5 pips below the lowest value(low) of the signal bar. When price starts moving up we move our stop 3 or 5 pips below the lowest value of some following bar.
- We close position, when price is broken from top to bottom or if price triggers our stop.
For short position:
- We go for shot (sell), when price breaks the lowest value(low)of the bar, which broke 20 period MA (signal bar) from top to bottom. We place stop 3 or 5 pips above the highest value(low) of the signal bar. When price starts moving up we move our stop 3 or 5 pips above the highest value of some following bar.
- We close position, when price is broken from bottom to top or if price triggers our stop.
Beside this strategy with breaking MA, signal can be generated when price is testing MA. In this case we use, that MA is playing a trend line role, and if price is in certain direction, this trend line should withstand the test. For this strategy we must have a trend , we can use MACD or ADX, but MA gives good indications for trend. If price is above MA we have uptrend if price is below we have downtrend.
Rules for opening and closing positions are:
For long position:
- Price should be above 20 or 50 period MA and price direction must continue upwards
- Price make a correction and test the MA. The bar that breaks MA is signal bar.
- We go for long (buy), when price breaks the highest value(high)of the bar, which broke 20 period MA (signal bar), from bottom to top. We place stop 3 or 5 pips below the lowest value(low) of the signal bar. When price starts moving up we move our stop 3 or 5 pips below the lowest value of some following bar.
- We close position, when price is broken from bottom to top or if price triggers our stop.
For short position:
- Price should be below 20 or 50 period MA and price direction must continue downwards
- Price make a correction and test the MA. The bar that breaks MA is signal bar.
- We go for short (sell), when price breaks the lowest value(low)of the bar, which broke 20 period MA (signal bar), from top to bottom. We place stop 3 or 5 pips above the highest value(high) of the signal bar. When price starts moving down we move our stop 3 or 5 pips below the lowest value of some following bar.
- We close position, when price is broken from top to bottom or if price triggers our stop.
