There’s a lot to think about when you’re a trader…
How much you’re going to invest…
How much to risk on a trade…
Which timeframe to trade…
Which markets to trade…
Whether it’s time to have another cup of tea while you mull over those decisions…
And, when your money is actually on the line, these decisions can become pretty stressful.
That’s why I’m a firm believer in not adding more complication to a system with out signals.
Your basic trading signal doesn’t need to be complicated. Instead of wasting your time playing around with different settings on your MACD you’d be better investing that time in making micro-adjustments to your exact entry and exit levels, or improving your staking plan.
Because, here’s the thing with technical indicators: all of them work, some of the time; and all of them will let you down, some of the time.
So, successful trading isn’t about finding the perfect indicator; it’s about finding an indicator, and perfecting your technique with it.
As Bananarama wisely put it: ‘It ain’t what you do, it’s the way that you do it.’
That’s why I want to show you a trading strategy that’s achingly simple. Yet, when you apply it to a chart, can quickly see that it has great power.
The clever bit is learning to harness that power.
I call this strategy ‘Zen’ because it’s so pared down. It’s nothing more than a moving average crossover.
Sure, there are bigger, faster and more complex technical signals out there. But some of the most powerful tools are the most basic.
A moving average is a smoothed out ‘average’ of the price’s movements. So, if you plot a 10-period moving average, it’ll be the average closing price over the last 10 periods.
The fewer the number of periods you’re averaging over, the more wobbly your line will be. But if you’re averaging over a larger number, like 200 periods, then your line will be very smoothed out.
Here’s a 4-hour FTSE chart showing a 10-period (in red) and a 30-period (in blue) moving average…
I’ve chosen a 4-hour chart as it’s short enough to give us some action, but long enough to give some substantial moves, without panic-stricken rushed entries.
When the faster moving average (the red one) crosses below the slower one, we have a signal to sell. When the faster one crosses above the slower one, we have signal to buy.
Looking at this chart for last month, we can see what looks like three easy winners, followed by two losing trades, and a sixth trade, which could have gone either way, depending on trade criteria.
So, already we’re looking at a 50% success rate at least with our trade signal.
It’s not a bad start, considering we’ve just plonked a couple of lines onto our charts.
What we can see from the chart about is that success is all about how to time your entry after receiving the signal.
Do we wait for the next candlestick in the right direction?
Do we wait for a three-point move beyond our signal candlestick?
Do we wait for the price to breach the fast moving average?
And where do we put our stops and targets?
Can we use our 30-period moving average to gauge a stop level?
Can a trailing stop allow us to take advantage of some of the bigger moves?
Moving average crossovers work brilliantly in trends, but really struggle when markets get stuck sideways (as they do towards the end of the month).
Is there a filter we can add to exclude these weak trades from our strategy?
I’d love to hear some ideas from Maven readers about how they’d build this into a meaningful trading strategy. I’ll share the best of them here.
I look forward to hearing your thoughts.
In the next seven days…
Assuming that there’s no escalation in Syria – and that Voyager 1 doesn’t meet any little green men during its first week out of the solar system – we can be pretty confident that next week’s big news will come on Wednesday evening, with the Fed statement and press conference.
When QE was introduced back in 2009, most people had never even heard of quantitative easing. Now it’s become part of our vocabulary.
And next week, the expectation is that the Fed will signal the beginning of the end for QE. The popular anticipation is for a cut of $75–85billion each month.
How can we expect the markets to react?
Well, the markets have been factoring this in for some time, and while we can expect some immediate turbulence, my guess is that the certainty of the news will have a calming effect after the months of speculation we’ve been through.
Of course, the reason QE is being tapered is because the global economy is strengthening. And there should be more signs of this next week.
In the US, figures on Monday are likely to show that industrial production rose last month. Surveys from the New York (Monday) and Philadelphia (Thursday) Reserves should again show slow growth. And housing data on Wednesday and Thursday are also expected to be positive.
For the UK, news to watch for is the inflation numbers on Tuesday, retail sales on Thursday, and minutes from the last MPC meeting on Wednesday, which will show how members are reacting to Mark Carney’s new forward-guidance policy.