Moving averages are in all likelihood the most widely used technical indicator. Inherently simple as a trading tool, moving average “buy” and “sell” signals are easy to spot, making them ideal for newcomers to the market. Moving averages were originally developed as a statistical concept, utilized to smooth short term fluctuations in various types of time series data.
Innovative traders soon realized that financial markets were in essence a large time series, and that moving average could be overlaid on asset prices to iron out the shorter-term fluctuations, leading to the eventual development of the Super Trend system.
Moving averages can be broadly classified in to three categories – simple, exponential and weighted. For our trading system, we will be using a simple moving average to pinpoint low risk entry zones in the direction of the broader market trend. A simple moving average (SMA) can be defined as the average price of an asset under consideration during a specified period of time. Thus, a 5-day simple moving average is the sum of the daily closing prices of the preceding five sessions divided by 5.
As is evident from the name, the average keeps shifting, whereby older price points are dropped from the calculation to include new incoming data. The primary function of the simple moving average is to identify the direction and strength of market trend. This can be achieved by merely eye-balling the direction and slope of the moving average.
- A sharply rising moving average signals that price is in a strong uptrend.
- A moving average that has a steep downward slope indicates that prices are locked in a steady down trend.
- A flat moving average depicts a directionless or range bound
John Murphy in his best-selling 1986 book, “Technical Analysis of the Financial Markets,” notes that crossovers between a shorter term simple moving average and a longer term simple moving average are powerful trend-change indicators. He calls them “double crossover” signals.
Intraday and swing traders prefer to look at the crossover between a 20-period SMA and a 50-period SMA, which is precisely what we will be doing through the Moving Average Super Trend system.
Underlying Asset: Any major cryptocurrency pair
Chart Type: Candlestick
Time Frame: 15 Minute, 3 minute
- 20-period SMA and 50 SMA on the 15 minute chart
- 3-period SMA and 5 SMA on the 3 minute chart
Long Entry Rules
- We first open the 15 minute chart window, and wait for the 20 SMA to cut the 50 SMA from below. It is important that both of them have rising trajectories.
- The crossover signifies that the short term trend has changed to up, and we should look to initiate only long trades.
- We next switch to the 3 minute time frame, and wait for the 3 SMA to cut the 5 SMA from below. Both the averages should again be rising.
- The precise entry point is signalled by a convincing close above the last major swing high on the 3 minute chart.
Stop Loss and Price Target
An initial protective stop loss is placed just below the low of the prior 5 candle bars. The trade is allowed to run until the 3 SMA changes direction and drops below the 5 SMA.
Cryptocurrency Trading Example: ETHUSD
Short Entry Rules
- We first open the 15 minute chart window, and wait for the 20 SMA to cut the 50 SMA from above. It remains imperative that both of them maintain downward slopes.
- The crossover suggests that the short term trend changed to down, and our market bias should be for short trades.
- We then shift to the 3 minute time frame, and wait for the 3 SMA to cut the 5 SMA from above. Both of these averages should also be declining.
- The exact entry point is signalled by a close below the last major swing low on the 3 minute chart.
Stop Loss and Price Target
An initial protective stop loss is placed just above the high of the previous 5 bars. The short trade is allowed to run until the 3 SMA crosses back above the 5 SMA.
Cryptocurrency Trading Example: BTCEUR
Moving Average Super Trend System Advantages
- Beginner traders make the mistake of thinking that moving averages are too simplistic to yield significant and consistent returns. Nothing is further from the truth.
- The system can be applied on any cryptocurrency pair and to any time frame.
- The “buy” and “sell” rules are clearly defined, leading to a discretion-free trade management process.
- All you need is just a few minutes each day to check the major cryptocurrency pairs and place your trades.