Why the Moving Average and its Endeavors could get you Broke?

My preferred way of trading is technical - I place an order by strictly following a strategy based on a combination of indicators, I exit the order again religiously respecting a predefined strategy. If you imagine you could successfully trade without a strategy go ahead, it’s a straight way to disaster and the fastest expressway to bankruptcy. So before even thinking to start real trading, drawing a strategy, a reliable strategy is a compulsory must.

 

How Moving Average Indicator Could get you Broke?

By far I consider Moving Average an indicator of real help and better than others, easy to follow and to visualize. But using a single indicator, or a single other technical tool like Japanese candlesticks or trend lines is most often not enough. Employing a combination of different indicators, say a trend indicator and an oscillator at least - may improve your trading results, even if it diminishes the number of signals to place an order. My preference goes to 35 SMA combined with MACD, and I basically use H1 time frame in accordance with my style of trading. Experience and exercise are needed in order to identify and distinguish between the potential profitable opportunities that MA offers and the noise of the market. MA is your best friend during trend evolution and a worthy adversary in flat evolution. Making the difference between a ranging market and a trending one is capital and MA can be of great help while identifying the direction of the trend. Its slope can offer hints about momentum and should always be checked visually before deciding to place a trade.

 

Errors Cost Money in this Game

For a long period of time I had a ”magnificent” habit: taking the signals of MA against the general trend; and I still run into décor from time to time. Even if the strategy was clear and simple: place order when the price action crosses the 35 SMA on H1 timeframe in the direction of the trend and when MACD passes through 0, it took lots of crushed nerves, loosing trades and heart palpitations to destroy this “dragon”. I most always took the signals of MA against the trend on correction wing, on a false assumption that the trend is about to change; the reality was most of the times pretty obvious but my forecasting “abilities” indicated the trend should change direction. Combine this with another “genius” hobby: placing the order too early before confirmation, because I am too anxious and not patient enough, or placing the order too late as I realized I waited too much and I am about to lose the opportunity. And so you have a beautiful pattern to crush some accounts and see red in front of your eyes. The market invoices you right away and you see the money flying graciously from your account. Brilliant! No comment!

This puzzle had to be ordered and solved if I wanted to become profitable, so one problem at a time.

 

 

Challenge 1: Trend Identification

Surprisingly the trend lines were correctly traced by the undersigned and the MA indicated the same direction, but I took 90% of the signals against the major trend line. You’ve got to be kidding! (Goose thinking: just do the reverse - you want to sell place a buy, if you are incapable otherwise). This “pleasure” of fighting against the trend was more than expensive and a damaging addiction.

The solution was to introduce a new rule: first step when you look to a chart and evaluate the opportunity of a trade, establish the direction of the trend, not verifying if you have a MA and MACD signal. Ascending trend – I am interested just in Buy signals, descending trend – just Sell signals, if flat – stay away. The direction of the trend is not always obvious enough and sometimes you just have to take the chance, but be prepared to get out without hesitation at the smallest sign of reversal.

 

 

Challenge 2: Get Rid of All the Bad Habits Like:

• Placing the order before the candle was closed above MA;
• Opening the trade even if the candle that crossed the MA is huge (larger than 50 pips)
• Opening a trade 2-3 candlesticks after the crossing of the MA (late entry)
• Opening a trade even if the candlestick closed above MA but MACD is far away from 0.

 

All this wrong timing had to end! So I needed a clear set of rules and i made my “cheat sheet”: wait for confirmation - enter only and if price closed a candlestick above/below the MA (only at that moment, not later). Enter on the first candle after the confirmation and only if the distance between the crossing and the entrance in pips does not surpass 20 pips (the smaller the distance, the better) and when MACD crosses zero, agreeing with my direction.

Once the rules are fixed they need to be respected religiously otherwise they are worth nothing. But this is another endeavor: discipline… and a new obstacle to overcome. My “cheat sheet” assumes the role of the bible, if one of these stages is not 100% clear the chances of loss increase and I should step away from that trade.

 

 

Final Words

Acting like a robot when it comes to following strictly the rules is highly desirable and it’s the reason why many traders try to automate trading by making use of Expert Advisors. The difference between gain and loss in trading is very thin and lays in small details, but these small details are crucial and if properly mastered they accomplish the task of keeping at reasonable distance the failure that is always blowing in your neck.