The Trading Strategy:
Two MA Cross
Trading Strategy Implementation:
Use the cross of the faster moving MA (in this case the 5 MA) over the slower moving MA (55 MA) as an entry. (MA selection and trading time frame, along with Money Management, would go on to create a trading system. We here are simply analyzing the strategy.)
Profits are taken at three times the distance between the entry and the stop. Stops are set at the previous low (if a buy situation) or the previous high (if a sell situation) with room for the spread plus one pip. Of course this method could be used in a variety of markets, so the spread may not have much meaning to you as a reader. For those of you who are Forex traders, the spread is certainly known, and determined by the broker and the pair traded.
This is a simple and often-used approach to trading, and as a strategy, actually carries some serious merit. The attraction to the method is that it is fairly simply to trade, and that the definition is certainly obvious.
There is a major concern that we have with any approach that requires an indicator to dictate entry. Indicators do lag, and even though some of these indicators do closely follow the price, they still do give reason for a trader to be concerned. (As you can see, we responsibly put the entry bar for notation not right at the cross; rather at the location of price when the cross appeared.)
Also, this trading strategy, like all MA trading strategies, requires traders to work on an active screen with a wiggling indicator. The moving average is a living, breathing thing, and this indicator does like to give false suggestions. To simply look at this indicator in frozen images, as we’ve presented, is somewhat misleading. We intend to follow up this explanation with a video presentation that touches on the weakness of such an approach. Moving averages wiggle, and deciding that one MA has definitively crossed the other is a somewhat subjective process of deliberation.
We did not bother to carry on with further accounts of the crosses for the particular day. As can be plainly seen, the market did not trend strong enough to sustain a reward that was three times the risk. These would plainly have been losses, but having said that, the fact is we’re addressing a New York Friday session, so to get in late and expect the market to trend considerably is probably a little hopeful.
We Pipsters certainly do not trade with MAs dictating our decisions, yet each of us know at least a couple successful traders who are able to manage similar strategies, and manage them well. The strengths are in the simplicity. Any trade filter that would suggest an overall direction to trade (bull or bear) would be of service to such an approach.
Expectations for such a style of trading would have to be responsible. Some may suggest that the risk:reward ratio we suppose a trader to employ may be a little aggressive. This is possible. That said, this is a system that is based solely on one indicator crossing another, and it seems only reasonable to us that the risk:reward ratio be heavily in favor of the trader in order to offer long term probability for winning. We also feel the system would only be responsibly applied during heavy market hours in order to utilize volatility in and effort to define strong trend.
This is a trend maximizing strategy, and appears as though it would suffer in a choppy market.
Any suggestions for developing this strategy are welcome. Please do offer the community any thoughts you may have through the comments section.