Moving averages are commonly used in technical analysis. There are many strategies that are built on them. One of such strategies uses the Simple Moving Averages and I will describe it today for you.
Key Takeaways🔑
| →Moving averages are commonly used in technical analysis to identify trends. |
| →Adding two moving averages can help reduce false signals and improve accuracy. |
| →The SMA 8/21 strategy focuses on the intersection of the 8-period and 21-period simple moving averages to identify trading opportunities. |
Contents
The moving averages interpretation
The classical interpretation of the moving averages is the same for all of them. And there are many different kinds like the simple moving average (which is the base for today’s strategy), the exponential moving average or the weighted moving average.
Usually, traders read the moving averages in relation to the closing prices of the underlying asset. When the closing price crosses above the moving average, you should buy. On the contrary, you receive a sell signal when the price crosses below the moving average.
This is a classic interpretation. Simple, yet full of false signals. Just look at the picture below to see what I am talking about.
Trading signals produced by two moving averages
To reduce the number of false signals traders often add another moving average to the chart. The second one should have another period than the first one. For example, you may use the SMA 9 together with the SMA 13, or the SMA 8 and 21, or 10 and 30. The moving average with a smaller period follows the movements of the price quicker than the one with the bigger period.
A buy signal is produced when the faster moving average intersects the slower one on its way up. And a sell signal is received when the fast SMA intersects the slow SMA on its way down.
A trading strategy based on the SMA 8 and the SMA 21
For today’s strategy, we are going to use two simple moving averages, one with a period of 8 and the second one with the period of 21. The first task is to define the current trend.
You can identify the downtrend when the fast moving average moves below the slow one. On the contrary, the uptrend can be defined when the fast average runs above the slow average.
Now, you should find the best point to enter the transaction. And to get the most out of it, you want to open a buy trade when the price is notably cheap and the market is in the uptrend. You want to enter a sell trade when the price is extremely high and the market is in the downtrend.
Entering a long trade with the SMA 8/21 strategy at Olymp Trade
When you are trading 1-minute fixed time trades at Olymp Trade and you want to open a long position, you should wait when it is cheap. First, you need a clear uptrend. If you have it, wait for price retracement. Choose the moment when the price moves below the SMA 8 and afterwards the SMA 21 as well.
When it will happen like in the picture above, open a buy fixed time trade. You can do that even in the middle of a candle creation. The reason for that is you want to pick a trade with opening price as low as possible. Price tends to bounce and continue the uptrend and after some practice, you can get a good winning percentage with this kind of entry.
Entering a short trade with the SMA 8/21 strategy
To enter a short trade, you should wait until the price moves above the SMA 8 and then, subsequently, the SMA 21. When the price clearly breaks through them it is expensive and you can open a sell position.
In the above chart, you can see such a situation. There is a downtrend and the price reverses first to reach the SMA 8, then the SMA 21. As you can see I was able to open a fixed time trade very close to the end of the upper shadow of the candle. You can see the result of that trade on GBPCHF below.
Pros and Cons of the SMA 8/21 Strategy 📈📉
Consider the advantages and disadvantages of using the SMA 8/21 strategy:
👍 Pros:
- Clear and simple signals based on moving average crossovers
- Potential for capturing trending market moves
- Can be used for various timeframes and trading instruments
👎 Cons:
- May generate false signals in ranging or choppy markets
- Relies solely on moving average crossovers and may lag behind price action
- Requires additional analysis to confirm trade setups
Comparison of Moving Average Strategies 📊
| Aspect | SMA 8/21 Strategy | Other Moving Average Strategies |
|---|---|---|
| Simplicity | ✅ | ✅ |
| Signal Accuracy | ⭐⭐⭐ | ⭐⭐⭐⭐ |
| Adaptability | ⭐⭐ | ⭐⭐⭐⭐ |
| Suitability for Trending Markets | ✅ | ✅ |
| Suitability for Ranging Markets | ⭐⭐⭐ | ⭐⭐⭐ |
Conclusion
The moving average is a very popular indicator used in technical analysis. It is possible to combine two averages to get better results. A strategy that I have described today, requires you add two simple moving averages to your chart. One is the SMA 8, and the other the SMA 21.
Observe how the price reacts with the moving averages and open the trading positions accordingly.
The SMA 8/21 strategy works best when there is a visible trend in the market.
Be aware of the fact, that there are no magic strategies that will assure you win all the time. Each strategy needs to be tested by you. But I have some good news. Olymp Trade offers a free demo account where you can do it without risking your own money. After some time of practising, the strategy may become pretty effective.
Share your results with us. There is the comments section further down the site. I would be happy to hear from you.
Best of luck!
Why You Might Want to Avoid 1 Minute Trades at Olymp Trade?
Q&A on the SMA 8/21 Strategy 🙋♂️
Here are some frequently asked questions about the SMA 8/21 strategy:
- Q: Can I use the SMA 8/21 strategy on any trading instrument?
- A: Yes, the SMA 8/21 strategy can be applied to various trading instruments, including stocks, forex, commodities, and indices.
- Q: How often should I monitor the SMA 8/21 crossover signals?
- A: The frequency of monitoring depends on your trading timeframe. For shorter timeframes, such as intraday trading, you may need to monitor the signals more frequently.
- Q: Can I use the SMA 8/21 strategy as a standalone trading system?
- A: While the SMA 8/21 strategy can provide trade signals, it is recommended to use it in conjunction with other technical analysis tools and confirmation indicators for better accuracy.
- Q: How can I avoid false signals generated by the SMA 8/21 strategy?
- A: False signals can be reduced by considering the overall market trend, using additional technical indicators, and practicing proper risk management techniques.
- Q: Can I automate the SMA 8/21 strategy?
- A: Yes, you can program trading platforms or use trading bots to automate the SMA 8/21 strategy. However, it is important to thoroughly test and validate any automated trading system before deploying it with real funds.