my simple trading strategy with sma

assume there are 4 chart timelines

1) 1 min chart= grandchild

2) 5 min chart = child

3) 15 min chart = father

4) 30 min chart = grandfather

buy on the basis of child chart, when price cuts sma 50 from below IF price is above sma 15 in father chart. with stop loss as the points when price cuts child or father chart respective sma mentioned above.

similarly, you can make strategy for short trades.

this strategy is for short term trading.

i know of some retired para commandos who can tackle any hound with bare hands and any big cat with just one stick. similarly, i also know some traders who trade with just sticks of sma....the simple the strategy, the better.... complexity confuses

standard disclosure : no responsibility of the outcome. pl consult certified financial advisor before trading. always trade small which you can afford to lose without losing sleep. trader discretion advised

how to judge a trend?

many of my mudraa friends keep asking me how to judge a trend.
many share with me that one of the main reason behind their loss is that they fail to judge the
trend.
so i thought i should post a separate reply for this.
while there are many ways to judge a trend
let me share with you just one or two
the easiest ones!
but before that
let me say share a fundamental mistake traders make
when they are looking for trends!
--
they look for the broader trend
and react on the sub-trend!
your losses may decline sharply by just this one change
- try to judge the trend of the day
and not the trend of "these days"!
--
we lose in a day and blame the week!!
--
there are trends in trends.
the smallest identifiable and tradable
trend is the trend of a few hours.
as mentioned by me in my recent posts,
a stock or nifty can have upto 3 trends in a day!
so, practically speaking you can be wrong in trend picking upto 3 times a day!
so, where is the question of knowing the trend of "these days"?
--
majority of traders take positional trades
which, on an average, lasts for 5 days or so.
at the rate of 3 trends per day
we are talking about 15 sub-trends in one trade!
so, as i was saying
traders take positional trade
expecting one broad trend
on the way
they get a big hit by one big move of the 15 sub-trends
and quit
licking their wounds
and cursing their skills!
--
it is surprising that
these swing or positional traders
are mostly
sitting in front of the terminal
for hours!
(they have taken very big trade bites
and so can't help looking at the terminal every now and then)
--
so if you are available in front of the screen
why not keep checking the sub-trends
and take timely intraday action
to protect your profits and/or investments!
--
now
lets talk about the trend spotting ways!
--
simple,
if the price is below sma 34
the trend can be broadly taken as down
and if it is above sma 34
the trend can be broadly taken as up!
during down trend
you will occasionally see price rising from below and trying to touch sma
and, at times, even piercing it thru!
similarly, during up trend
you will occasionally see price sliding from above and trying to touch sma
and, at times, even piercing it thru!
both these situations don't indicate
change of trend
unless
the price stays well on the other side of sma34
for good time!
--
generally
during uptrend
the feet of the price zig zag
stays above sma34!
and
during downtrend
the price wave hangs from the sma34 line above
like wet clothes hanging with clips from a wire!
--
i find this simple way
enough in most of situations!
both for intraday
as well as positional trades!
i use google finance charts.
(http://www.google.com/finance?q=NSE:.NSEI)
on 1 month chart
sma 34 setting automatically takes 30min tick size
on 5 day chart
sma 34 setting automatically takes 5min or 2min tick size
on 1 day chart
sma 34 setting automatically takes 2 min tick size!
different software take different tick size
and it makes hell of difference!
if the sma34 setting is ok
you will be able to judge the trend reasonably accurately and timely!
--
another way to estimate a trend is
to join the top and bottom points in a zig zag price movement!
if both are falling
the trend is down.
if both are rising
the trend is up.
if both are in opposite direction
then the trend is more or less rangebound
with a bias towards the line which has more sharp angle w.r.t. horizontal.
--
majority trend reading errors happen
because we assume that
price moves in straight line!
this is fundamentally
and totally wrong!
price movements happen
in zig zag movements
just like the movement of a snake
on sand of desert!
we see just one arm in the zig zag movement
and take the fatal decision!
--
trend is a friend
and it pays to recognize one correctly!

simple but very effective

(comments from discussion on trade 5
http://www.mudraa.com/singlepost.php?messid=74251)


dear vishu,

no doubt sma is a lagging indicator.

but this is exactly its strength.

had it been not lagging, it would be of no use to us!

let me explain with an example.

let us consider sma14/30min on 1 month chart

what does this sma line represent?

it represents the average of last 14 readings of price each separated by 30 minutes.

14 readings x 30min = 7 hours

one trading day = approx 7 hours

so sma14/30min represents the trend of 1 day on moving basis.

when the price suddenly changes direction

sma doesn't change direction so fast

as it is a LAGGING indicator

and hence the price CUTS ACROSS the sma line

thus indicating a probable change in

market's mood

when compared to its behaviour over last 1 day or so.

this is a signal of the change in the very short-term trend!

with the confirmation from other indicators

profitable trading positions can be taken

all thanks to

the sma being

a LAGGING indicator

least painful trading method - II

(this is a sequel to part I. to understand it in the right context pl read part I and the related discussion at http://www.mudraa.com/singlepost.php?messid=74251)

here is a reasonably dependable way to successfully identify and ignore the false price crossover of sma line

in other words, this is a good way to anticipate and foresee a whipsaw before hand:

keep rsi 14 and william%r14 charts open under the main price+sma chart

if the price cuts sma from below and gives a buy signal but

william%r is near extreme overbought boundary whereas rsi is not near any extreme

square-off short position but wait for going long

9 out of 10 times price will reverse and short position will need to be taken again

if all this happens near the close of the trading day

the risk of keeping the short position open is well-taken!

---

conversely

if the price cuts sma from above and gives a sell signal but

william%r is near extreme oversold boundary whereas rsi is not near any extreme

square-off long position but wait for going short

9 out of 10 times price will reverse and long position will need to be taken again

if all this happens near the close of the trading day

the risk of keeping the long position open is well-taken!

---

even otherwise,

this is a superb way of successfully spotting reversals 9 out of 10 times

RSI-SMA Doubletrap technique (II)

1) Buy when priceline cuts the SMA 34 line from below after bullish divergence between RSI 14/30min and priceline on 1 month chart (Bullish divergence = When price is going down and rsi going up).

Hold till priceline cuts SMA 34 line from above.

2) Short when priceline cuts the SMA 34 line from above after there is bearish divergence between RSI 14/30min and priceline on 1 month chart. (Bearish Divergence = when price is going up and rsi is going down).

Hold till priceline cuts SMA 34 line from below.

RSI-SMA double-trap technique

For those who find applying RSI difficult, try the following technique

When price on 1month chart (Google finance) cuts SMA 34 line

a) from above, short till RSI 14/30min on 1 month chart touches 20

b) from below, long till RSI 14/30min on 1 month chart touches 80

Stop loss: When price whipsaws to cut 34 SMA again.

Pl note:- "cutting" includes the crossover due to gap up or gap down

Deadly combination of 34 and 8

This is the next version of EMA crossover strategy.

Pl. note that this is not for Day Trading but amazingly effective for short-to-medium term trading.

The difference in this strategy w.r.t the EMA crossover technique discussed earlier is that here there are 3 characters instead of two.

1) EMA 34 line

2) EMA 8 line

3) Priceline

EMA 34 is effectively 1 month weighted average

EMA 8 is effectively 1 week weighted average

A) When price cuts EMA 34 from below, Buy.
Square off when it cuts EMA 8 from above.
If it again goes above EMA 8 , buy again.
.....

B) If the price cuts EMA 34 from above, Short.
Square off when it cuts EMA 8 from below.
If it again dips below EMA 8, short again.

The buy or sell has to be decided near market close so that it is confirmed that "the cut" has decidedly taken place.

Also EMA strategies work even better in trending markets. No harm in waiting till range bound movement.

However, I prefer doing it without bothering whether it is trending or ranging, otherwise you may miss a sudden big move.

Also, if 34ema and 8ema, both are very close to each other, a sharp movement of 8 ema and hence that of the price is likely in the next few sessions.

A strict stop loss of 8ema is advisable.

When 8ema and 34ema are these close, it is not unwise to wait a bit, but not compulsary if stop loss in place.