Generally, I advise against opening short-lasting positions. One reason is that even small price fluctuations can change a result within seconds. If you hold a position for 1 minute only, the probability these fluctuations will influence your trade is pretty big. On the other hand, if you enter the position for 5, 15, or 30 minutes this probability decreases.
The second reason against short-lasting trades is the fact, that the analysis of the market is more difficult and inaccurate in a short period of time. Moreover, it leaves less time for making a decision and thus puts more stress on your shoulders.
Naturally, no one can guarantee that every long-lasting position will be successful. But the probability of earning will increase and that is enough for me to hold a position open for a longer time.
We can do something more. We can use extra tools that help to read signals. Let me introduce you to Simple Moving Average and the support/resistance levels.
How to prepare the chart on the Olymp Trade platform for trading with SMA and the support/resistance levels
A simple Moving Average is an indicator that follows the trend. It is developing as a result of calculating the average price of a financial instrument in a specified number of time frames. There is a lag in SMA because the average price is calculated based on the earlier price and this is why this indicator cannot be used to predict the trend direction.
Once you are logged into the Olymp Trade account and choose the instrument and the chart type, you can set the indicator. You will need to click on the indicator feature, search for SMA, and select it.
You will see a new small window with the moving average parameters. Hit the pen icon and then you can modify the period. You can also modify the color and the width of the line if you wish.
I will use two SMAs here. SMA with a period of 10 and the other with a period of 30. I will also change the color of the second one so the chart is more distinct.
We have already SMA set so now only the support/resistance lines are left. Click on the indicator feature first. Scroll down until you find “drawing”. You have two choices on where to draw the line. Either using a horizontal line or the trend line. The main difference is that the first one is infinite and the other is limited to the desired length.
What SMA10 and SMA30 are telling us
On the chart, you will see SMA10 and SMA30 cross each other from time to time. In the example, SMA10 is orange and SMA30 blue. If the first one is moving below SMA30 and then cuts it and starts moving above, what more the space between them expands, this will mean the uptrend is formed.
In the opposite situation, when SMA10 is moving above SMA30, then cuts it and starts moving below, besides, the gap expands, this will signify the downtrend.
If two lines are crossing often and remain in the small distance, we have a ranging market.
This knowledge is obviously not enough to be able to identify the best moment for trade entry. This is why you will need to use SMA10 and SMA30 alongside the support and resistance levels. You can enter the trade only when both indicators will cut the support or resistance and the space between will increase. Let’s discuss it further.
How to trade with SMA10 and SMA30 in a combination with the support/resistance
The strategy we are talking about works well when trading at larger intervals. Thus, do not use 1-minute candles. Use 5-minute candles instead. Then you can open a position that lasts 30 minutes or even longer.
When to enter a short position
Take a look at the exemplary chart below. The price cuts the support level and goes down. SMA10 was until then moving above SMA30, but now it crosses SMA30 and moves below. Moreover, the gap between the lines is widening. This is a good moment to enter a sell position. It can last 30 minutes or longer.
When to enter a long position
The trend rises and finally, the price smashes through the resistance level. SMA10 crosses SMA30 and starts to move above it. The space between lines is getting wider. Now is the time to open a buy position for the duration of 30 minutes or more.
Pros and Cons of the SMA and Support/Resistance Strategy
|Pros 👍||Cons 👎|
|Helps identify trade entry points more accurately||Not suitable for short time frames|
|Effective for various financial instruments||Requires patience and practice to master|
|Reduces the impact of small price fluctuations||May not work well in highly volatile markets|
Comparison: SMA and Support/Resistance Strategy vs. RSI and Support/Resistance Strategy
|SMA and Support/Resistance Strategy||RSI and Support/Resistance Strategy|
|Follows the trend direction||Identifies overbought and oversold conditions|
|Utilizes two moving averages with different periods||Uses a single indicator with adjustable parameters|
|Focuses on the intersection of moving averages||Relies on RSI crossing predefined threshold levels|
|Best suited for longer time frames||Can be used on various time frames|
You can easily predict the direction of the developing trend with the help of SMA10 and SMA30. All you need to do is to watch when they intersect and if the area between widens. When you combine it with the support and resistance lines, you will get a clear picture of the upcoming trend and trade entry points.
Use the knowledge you have just gained and hurry to your Olymp Trade account. I always recommend trying new strategies on a demo account first. Once you get the hang of it, move to the real account. Don’t forget to share your thoughts with us.
Best of luck!
Q&A: SMA and Support/Resistance Trading Strategy
- Q: How does the SMA and support/resistance strategy help in identifying trade entry points?
- A: The strategy combines the intersections of two moving averages with support and resistance levels to provide clearer signals for entering trades.
- Q: Can this strategy be used for short time frames like 1-minute candles?
- A: It is recommended to use longer time frames, such as 5-minute candles, to minimize the impact of small price fluctuations and improve the accuracy of the strategy.
- Q: How can I practice this strategy before using it on a live account?
- A: Use a demo account to practice the strategy and gain experience before applying it to a live trading account.
- Q: What financial instruments can be traded using this strategy?
- A: The strategy can be applied to various financial instruments, such as forex, stocks, commodities, and indices.
- Q: What is the main difference between the SMA and support/resistance strategy and the RSI and support/resistance strategy?
- A: The SMA strategy focuses on the trend direction using two moving averages, while the RSI strategy identifies overbought and oversold conditions using the Relative Strength Index indicator.
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