Swing Strategy Simple #8:(Simple Moving Average Trading Strategy With 5SMA, 10 SMA, Stochastic & RSI indicators)

Moving average trading  in forex can be very profitable…especially if the market is trending nicely.

In a metatrader trading platform (MT4), there are 4 different types of moving averages:

1. Simple moving averages or in short, SMA 
2. Exponential Moving Averages or EMA
3. Smoothed Moving Averages (SM) &
4. Linear Weighted Moving Averages

We will not go into technical details of how to calculate moving average formula…blah blah blah, because this is not the point of this page.


WHAT YOU NEED ON YOUR FOREX CHARTS

1. Two Simple Moving Average (SMA) values 5 & 10
2. Stochastic Indicator, settings=14,3,3 and level 20 & 80(20 level is considered oversold market  and 80 level is considered overbought market)
3. RSI Indicator, settings period=9

Here are some important trading tips for the simple moving average trading strategy:

• the 5sma is a fast simple moving average
• the 10sma is a slow simple moving average
• so when 5simple moving average crosses the 1osimple moving average to the upside, this may indicate that an uptrend has formed.
• the opposite is also true: if 5simple moving average crosses the 10simple moving average 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.

(trading rules below!)

SO IN SUMMARY, HERE’S WHAT IT MEANS…

1. the simple moving averages help us identify a new trend as soon as possible when it forms (when simple moving average crossover happens) 
2. the stochastic indicator is for determining if its suitable to enter a trade after the simple moving averages have crossed, whether the market is overbought or oversold (remember the 20/80 levels, ok?)
3. The RSI indicator is an additional confirmation tool which is used to determine if the trend is strong or not. If RSI>50, then the trend is strong.

Now that you know the logic behind the simple moving average method and all the forex indicators, what timeframe is best suited for trading this trading system?



TIME FRAMES REQUIRED TO TRADE THE SIMPLE MOVING AVERAGE FOREX TRADING METHOD

Suggested time frames to trading using this simple moving average strategy is 4hr or the daily time frames.

Remember that depending on the time frame you choose, your stop losses can be either smaller of larger.



SIMPLE MOVING AVERAGE TRADING METHOD’S RULES

Trading Rules For Short Entries(Selling)

1. wait until 5sma crosses 10sma to the downside
2. watch and wait for the next candlestick that forms after the simple moving average crossover. Once this candlestick closes…
3. Look down and 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.
4. Check to see if the RSI indicator is at or above the 50 level line.
5. If both the Stochastic indicator confirms oversold condtion and the RSI is at 5o or above 50 level then place a sell stop order at least 3-5 pips under the low of that candlestick. Just wait for price to break below the low of that candlestick to trigger your sell stop order.
6. For stop loss, if you are trading on the daily timeframe, you need to place anywhere from 50-100 pips stop loss. The stop loss will be much smaller if you are trading on the 4hr charts.
7. For take profits here’s what you can do:

• 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.

Trading Rules For Long Entries(Buying):

So we have covered the selling rules of simple moving average trading trading system, what about the buying rules?

Well, its the exact opposite of the what you’ve just read above:

1. wait for 5ema to cross 10eama to the upside
2. then check your Stochastic forex indicator to make sure its in the oversold condition(below 20 or at least just heading above 20 level)
3. then check your RSI indicator to confirm if its at 50 level or above 50 level which would indicate a strong trend.
4. Once everything is all lined up…moving average cross over? check!  Stochastic oversold? check!  RSI around 50 level or above 50? Check!
5. Then place you buy stop order 3-5 pips above the high the candlestick.
6. Stop loss should be place anywhere from 50-100 pips away,this depends on your trading time frame too.
7. take profit is similar to that of selling but do the exact opposite.