Effective SMA20 strategy for derivative traders


sma20 featured image

SMA stands for a Simple Moving Average. It is widely used and it is also a user-friendly indicator on the Olymp Trade platform. SMA follows the trend and thus is of great help when looking for a good trading opportunity.

Here we will show you the basics about SMA you need to know to trade at Olymp Trade.

Configuring SMA(20)

In this guide, we will use a Japanese candlesticks chart for EURUSD, a 5-minute timeframe, as an example.

Once you log in, choose the asset and timeframe, click on the indicators feature (1). Find SMA under “Trend indicators” (2).

How to add SMA to the chart
How to add SMA to the chart

You can change SMA settings by clicking on the pen button (1). We recommend choosing a period of 20 for this particular strategy.

Changing period and line width of SMA
Changing period and line width of SMA

How to trade with SMA(20) at Olymp Trade

Your goal while trading with SMA(20) is to find the points where the indicator’s line crosses the prices.

In the case, SMA(20) is moving above the prices, and then touches or crosses a green candle (1), you can expect the trend to continue downwards. It will be confirmed when the red candle appears (2) after the green one and the indicator stays above the prices.

In the case, SMA(20) is moving below the prices, and then touches or crosses a red candle (1), the forecast is that the uptrend will be sustained. You will get the confirmation when the green candle appears (2) after the red one and the indicator remains below the prices.

Look at the below charts.

Short position example
Short position example

Long position example
Long position example

3 exemplary entry points indicated by SMA(20)

Three successful trades in a row
Three successful trades in a row

(1) This is the first signal from SMA(20) to enter the trade. The Simple Moving Average is placed above the prices and cuts the bullish candle. However, it crosses almost at the bottom of the candle. You need to wait for the two bearish candles and just then enter a 5-minute sell position.

(2) In the second point, SMA(20) is also moving above the prices. It cuts the bullish candle and then the bearish candle develops. The indicator remains above the prices. You can deduce the downtrend will continue so when the next bearish candle appears you should enter a 5-minute sell position.

(3) The situation here is quite similar to the second one. SMA(20) cuts the bullish candle and remains above the prices. The next candle that develops is the red one. So with the subsequent bearish candle, you should again, enter a sell position.

Reading the signals from SMA

The Simple Moving Average is so great because it is so simple. You just need to observe when it touches or crosses the candles and where it is situated about the price chart. After, the only thing left is to enter the trade.

The moment you ought to open a position is after the second candle (after crossing with SMA) fully develops. This will give you the certainty that the trend is going where you thought it would go. The interval should be 5 minutes.

Is SMA20 a good indicator to trade with?

Some say the Simple Moving Average indicator is not a solid one because of its delay in action. But when markets are trending, it is a worthy technical analysis tool.

trend trading with SMA

As you could see in the examples above, SMA(20) is not only simple but also reliable. You need to watch carefully its relation to the prices and the result should be satisfactory.

However, SMA(20) is not the best tool to use in the markets of high volatility, when the prices change rapidly, for example, when some news cause sudden action.

SMA with a proper money management strategy

Using SMA(20) can generate a consistent profit. You can apply compounding as a capital management strategy. You can begin with 2-5% of your capital as an initial investment. In the following transactions, you trade with the initial investment plus the profit you gained earlier.

Let’s say your balance account is $1000. You invest $20 in a trade. With an 80% return, you will make $16 as a profit. Now, in the next trade, you put $36 either the first transaction was beneficial or not.

With this strategy, you will close the day at a win even making only 3 trades per day.

money management with sma20

 

Psychological aspects of trading with SMA

Trading with SMA is not technically difficult. But you need to be careful because the impatience can cost you a loss. SMA(20) signals sometimes appear infrequently and you have to wait and analyze the market patiently before entering the right trade.

And if it happens, that there was a signal but you missed it, just let it go. Wait for the next opportunity, do not rush things. Because if you decided to enter the trade in such a moment anyway, you would most surely end up losing.

psychologically prepared

The last thing to do is to put your knowledge about SMA into practice. Go ahead and open a free Olymp Trade demo account, if you do not have one yet. Treat your demo account as if you’re dealing with real money, so that you will surely learn. In the real market, always be wary of losing trades. Expect the unexpected. This strategy is not risk-free.

Try for yourself how the Simple Moving Average indicator suits you and share your comments with us.

We wish you only profitable trades!

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Bart Bregman

Full time day trading, and helping out with Olymp Trade wiki in my spare time to create an awesome platform for beginners. I'm a digital nomad that travels the world while working from everywhere!

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