In a metatrader trading platform (MT4), you will see 4 different types of moving averages:
- Simple moving averages or in short, SMA
- Exponential Moving Averages or EMA
- Smoothed Moving Averages (SM) &
- Linear Weighted Moving Averages
What is being used here is the simple moving average indicator or in short, SMA.
Timeframes: 5mins and above [sociallocker]
Currency Pair: Any
- 5 & 10 Simple moving average (SMA) indicators
- Stochastic Indicator, settings=14,3,3 and level 20 & 80(20 level is considered oversold market and 80 level is considered overbought market)
- RSI Indicator, settings period=9
WHAT YOU SHOULD KNOW
- the 5 SMA is a fast simple moving average
- the 10 SMA is a slow simple moving average
- when 5 SMA crosses the 10 SMA to the upside, this indicates that an uptrend is potentially happening.
- if 5 SMA crosses the 10 SMA to the downside, this may mean a downtrend has formed.
- the stochastic forex indicator is used to indicate whether the market is oversold(if its below the 20 level line) or overbought( if its above the 80 level line).
- the RSI indicator is a forex indicator used to measure the strength of the trend. RSI should be above the 50 level for a trend to be considered strong.
SIMPLE MOVING AVERAGE FOREX TRADING STRATEGY RULES
Refer to this chart for the trading rules written below:
- wait for 5 SMA to cross 10 SMA to the downside
- after the SMA have crossed, then watch and wait for the next candlestick that forms Once this candlestick closes…Look down to see if the Stochastic indicator either above the 80 level or has started to head down below the 80 level, if that is the case, then you are not done yet. You need the check one more thing: the RSI indicator.
- Check to see if the RSI indicator is at or above the 50 level line.
- If both the Stochastic indicator confirms oversold condition and the RSI is at 50 or above 50 level then place a sell stop order at least 3-5 pips under the low of that candlestick. If price breaks below the low of that candlestick it will trigger your sell stop order.
- For stop loss, if you are trading on the daily timeframe, you need to place anywhere from 20-100 pips stop loss which depends on the timeframe you chose to trade in. Larger timeframes require larger stop losses.
- For take profits here are a few options you can use:
- keep holding your trade until an opposite trading signal is given so you exit your trade.
- or you can set your take profit target at 3 times what you risked in pips, for example, lets say that you risked 50 pips for a sell trade and when you reach 150 pips profit, you exit. (150 pips profit is 3 times the 50 pips you risked)
- for trade management, you can continue to move stop loss above subsequent lower peaks as price continues to move down so effectively locking in your profit as price moves favorably.
- wait for 5 SMA to cross the 10 SMA to the upside
- when that happens, you then check your Stochastic forex indicator to make sure its in the oversold condition(below 20 or at least just heading above 20 level)
- next thing you do is then then check your RSI indicator to confirm if its at 50 level or above 50 level which would indicate a strong trend.Once everything is all lined up…moving average cross over? check! Stochastic oversold? check! RSI around 50 level or above 50? Check!
- Next thing you do is then place you buy stop order 3-5 pips above the high the candlestick.
- Stop loss should be place anywhere from 50-100 pips away,this depends on your trading time frame too.
- take profit is similar to that of selling but do the exact opposite:
- keep holding your trade until an opposite trading signal (sell trade) is given so you exit your buy trade.
- or you can set your take profit target at 3 times what you risked in pips, for example, lets say that you risked 50 pips for a buy trade and when you reach 150 pips profit, you exit. (150 pips profit is 3 times the 50 pips you risked)
- for trade management, you can continue to move stop loss above subsequent higher lows as price continues to move up locking profits as price moves in your favor.
Don’t forget to share this simple moving average forex trading strategy with your friends by clicking those buttons below. Thanks