5 10 Day Moving Average Strategy

The simple moving average strategy needs a market with a clear trend to work as an effective trading strategy.

Once the chart starts showing sideways price action, the moving average strategy becomes almost useless, though moving average convergence can still help you read the market objectively.

Some trading strategies take advantage of consolidation: they either trade the range or use a breakout strategy. Learning the different technical-analysis methods for spotting favourable range conditions is something traders need, so they do not get caught in trading consolidations when they think they are trading a trending market.

This moving average strategy focuses on pullbacks within a trending market, and we combine it with measures of:

• the strength of the trend we are trading
• whether price is oversold or overbought

You can use the moving average strategy on currencies or commodities such as gold, or other markets, and as a day-trading, swing-trading or even position-trading approach.

The Difference Between Simple and Exponential Moving Averages

In practice, the differences between the various forms of moving averages will not improve a trading strategy to any measurable result. We use simple moving averages, of course, and with the simple moving average we take the average price of the last X days.

Exponential moving averages factor in more data than the period used, although the effect of historical price data fades over time.

Let us keep things simple and stick with the SMA

Time frames

You can use lower time frames such as the 5-minute chart. Higher time frames (4-hour to the daily chart) are my preferred time frames for trading forex.

Currency

Any currency pair, but stick to pairs that trend, such as EUR/JPY, EUR/USD and GBP/USD.

Indicators

• 5 and 10 simple moving averages (SMA), a stochastic oscillator set to 14,3,3, and RSI settings of 9

We use the stochastic at 80/20 for oversold and overbought markets.

RSI (Relative Strength Index) measures the strength of the trend.

Spotting the trend with moving averages

The 5 SMA is a fast moving average, and we combine it with the slightly slower 10-period simple moving average. When the 5 crosses above the 10 to the upside, we assume we are in an uptrend.

When the 5 crosses below the 10-period simple moving average, assume we are in a downtrend.

This is a nice objective way to gauge the trend, although with any technical indicator you will have a gap between price action and the indicator showing the change in direction.

Rules of the moving average strategy

As with any trading strategy, you have to follow the rules or you will not find much success. Better still, make sure you have a trading plan that dictates every step you take in the markets.

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

1. The first thing we look for is the 5-period simple moving average crossing the 10 SMA in the downward direction.
2. Check that the RSI is either crossing or has crossed the 50 level, indicating that momentum is to the downside.
3. Has the stochastic left the overbought zone, or is it on its way out and heading downward?
4. If all of the above is yes, place a sell stop order below the low of the candle that flipped the moving averages.

This is how you identify a sell trade, and before you trade the sell signal, make sure you know where you will exit if you are wrong. We will cover stop-loss placement later. The candle marked as the setup candle may not be the one that actually flipped the moving averages.

Remember that moving averages are lagging indicators, and the next candle may be the one that showed a clear turn.

The buy signal is the reverse of the sell signal

1. Notice that the moving averages have crossed over and the 5-period simple moving average is above the 10-period.
2. The RSI has already passed the 50 level, indicating an uptrend.
3. The stochastic has crossed up from oversold and is heading higher.
4. A buy stop order is placed above the high of the candle that flipped the moving averages.

The only difference between the sell signal and the buy signal is the direction the indicators need to show.

Stop loss in the moving average strategy

I am not a believer in a fixed number of pips for a stop loss. You have several methods you can use for a protective stop loss:

1. Use the high or low of the setup candle and place the stop-loss order below (or above) that candle. This is dynamic because every candle has a different price range.
2. Use the average true range to place the stop loss.

Whatever method you use, the key is to be consistent across all your trade setups. This is why you need a trading plan to make sure you stay on track.

Take-profit strategies

Like placing a stop loss, taking your profit is not one-size-fits-all.

Some traders will target different support or resistance levels to exit their trade.

Fibonacci price targets

I have to say that one of my favourite ways to find profit targets for any strategy, including the moving average strategy, is Fibonacci extensions.

As you can see on this chart, price found all three targets, including finding the top at the 200% level measured from the previous swing.

I might write an article on how to use Fibonacci for taking profit; I find it very useful, since the different levels also act as zones for scaling out of partial profits.

Summary

As you can see, the moving average strategy takes both trend and momentum into account for your trading signals.

Make sure you use proper stop-loss orders, control your risk, and find ways to take what the market offers without overstaying your trades.

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• Moving Average Crossover Strategy
• 50-Day SMA Strategy
• 1-Minute Forex Scalping Strategy
• Moving Average Indicator
• Weighted Moving Average (WMA)