They fail to determine the right entry and exit times. This uncertainty makes them leave profitable trades too early or enter losing trades too long. The problem is that they cannot differentiate between a genuine strength of the move in the market and a retracement. Hence, traders often miss their winning opportunity and suffer frustration and losses of money.
In such confusion, moving averages can come in as a strong means to alleviate some of the trading decision burdens. Moving averages overcome price data noise by creating smooth curves and thus make it easier for traders to spot trends and reversals. Using a mix of moving averages, like the 50-period Simple Moving Average (SMA) and the 15-period Exponential Moving Average (EMA), will improve your ability to assess market strength and weakness. Thus, this strategy will align trading decisions with the overall direction of the market.
In this article, we will look at an easy moving average trading system that combines the best of these indicators to give clear entry and exit signals. You will learn how to combine the 50 SMA with a 15 EMA, allowing you to trade profitably and safely.
What are Moving Averages?
A moving average is a type of technical indicator that calculates the average value of an asset’s price over a specified period. Moving averages may be used in the identification of trends, to fill gaps occurring due to price movements, and can also give signals for entry and exit points.
- Simple Moving Average (SMA): It averages a fixed number of past prices. A 50-period SMA is an average of the last 50 closing prices. This is a lagging indicator, meaning that it will react to price changes after it has happened.
- Exponential Moving Average (EMA): The EMA pays more heed to the latest prices, thus being a far more responsive indicator of contemporary market activity. This gives the EMA a head start over the SMA in responding to changes in prices, which helps traders detect trends sooner.
Easy Moving Average Trading Strategy
Step 1: Setting Up Your Chart
To implement this moving average strategy, first add the following indicators on your trading chart:
- 50-period Simple Moving Average (SMA)
- 15-period Exponential Moving Average (EMA)
Almost every trading platform will allow you to easily switch between the type and period of moving averages.
Step 2: Identifying Market Trends
The first element of the strategy is the identification of the underlying market trend through the moving averages:
- Bullish Trend: If the market price is above the 50 SMA and the 15 EMA, further above the 50 SMA, then the market is in a bullish trend.
- Bearish Trend: Contrary to this, if the price is below both moving averages and if the 15 EMA is below the 50 SMA, then it is in a bearish trend.
Step 3: Entry Points
The other is to look for entry points based on the interaction between the price and the moving averages:
Entering a Long Position
- Monitor for the price to revert back toward the 15 EMA in an uptrend.
- If the price can touch or bounce off the 15 EMA and the broad trend remains higher, it is time to get long.
Entering a Short Position
- Monitor for the price to revert back toward the 15 EMA in a downtrend.
- If the price touches or reverses from the 15 EMA, and the trend is still bearish, you would enter a short position.
Step 4: Moving Averages as Exits
To avoid that trade being liquidated too early or too late, look to the 50 SMA for guidance in exiting a trade:
Exit Long Positions:
- If the price falls below the 15 EMA during a bull run, it might be a sign that the trend is weakening.
- Stand out of your long position if the price falls to the level of the 15 EMA or approaches the 50 SMA.
Exit Short Positions:
- If the price in a trend breaks up above the 15 EMA in a downtrend, it may be the signal that increasing strength can come upwards.
- Consider getting out of your short position if the price breaks up and goes up above the 15 EMA or approaches the 50 SMA.
Risk Management and Trade Management
Setting Stop Loss Orders
Use stop losses to control the risk. Place the stop loss immediately below the last swing low for long positions or immediately above the swing high for short positions. This ensures that some capital will be left in place if things are not as you expected when you pull out from your trade.
Position Sizing
Determination of the right position size is integral so that you do not overexpose yourself in any given trade. The most common practice is to risk a small percentage, 1-2%, of your trading capital on each trade.
Conclusion
The easy moving average strategy is supposed to be a systematic approach towards navigating the complexities of the financial markets. From the 50 SMA and the 15 EMA, traders can identify trends and know the entry and exit points to minimize pitfalls in early trade exits.
Remember that you have to sustain sound risk management and keep updating the strategy because of the dynamics in the market. With experience and time, this strategy with the moving average may help ensure that you remain in profitable trades longer and experience fewer losses with the constant change in market dynamics.
Start trading using the simple moving average trading strategy today and see how it can change your trading career!
