Trading with the SMA 8/21 Strategy
Trading is not for everyone – especially for those who are not using the right tools and strategy. If you’re looking for ways on how to get better at trading stocks, you should take hold of strategies that would suit your style of trading. If you’re a day trader or a swing trader, you would find trading with the SMA 8/21 strategy a good strategy to consider. So, what is the SMA 8/21 strategy, and how to apply it on actual charts on Binary Options platforms like Pocket Option?
What is Moving average?
Before we get right to the strategy, let’s first understand its fundamental component which is the moving average.
A moving average is a tool for technical analysis which represents price data through a smooth line. This technical analysis tool is created by averaging the total price over a specified period. As an example, a 10-day moving average is drawn on the chart by dividing the total price of 10 days by 10. As the price updates, the total price is also updated.
There are two basic kinds of moving average – one is the SMA or Simple Moving Average, and the other is the EMA or Exponential Moving Average. The SMA is computed simply by dividing the total price in a given period by the period or number of days. On the other hand, the EMA makes use of a complex formula that considers recent price action. For this strategy, we’ll just be focusing on the Simple Moving Average.
Moving averages are used generally to identify the trend or direction of the market. Other traders also use it to identify support and resistance levels on a chart. While the moving average is already good on its own as a technical indicator, it can also be incorporated with other tools and indicators to provide a more accurate analysis. Among the indicators that incorporate moving averages is the MACD or Moving Average Convergence Divergence.
SMA 8/21 Trading Strategy
The SMA 8/21 Trading Strategy hinges on the fundamentals of the moving average – which is to identify the trend and the direction of the market. For this strategy, it will be using two moving averages on different periods – one that is longer, and the other shorter. For this case, we’ll be using an 8-day moving average period and a 21-day moving average period.
In Pocket Option, the moving average tool can be accessed through the list of indicators from the upper right corner of the chart as shown in the image (step 1). From the dropdown menu, simply choose ‘Moving Average’ from the list (Step 2). For this strategy, we’ll be using two moving averages so make sure to click twice.
At the upper right corner, you’ll see the options for your moving average (Step 1). Click the pen icon to open the settings and change the default period to 8 and 21 respectively (Step 2).
Establishing a long and short moving average immediately provides you with a visible representation of the direction as well as trends of the price movements. On this image, the blue moving average represents the SMA8 or the short MA, while the red moving average represents the SMA21 or the long MA. Notice how the short MA has deeper and more curves than the long MA which has smooth curves. By simply establishing the moving average, the trend and direction of the price movement can be easily identified.
How to identify buying and selling signals
Referring back to the previous image, there were instances when both moving averages overlapped or crossed each other. The moment the short MA crosses on top of the long MA, it gives off a signal called “golden cross” which is a buy signal. However, if the short MA crosses below the long MA, it gives off a signal called “death cross” which serves as a sell signal. Examples of when both moving averages cross each other are encircled on the image.
SMA 8/21 Trading Strategy on Trades
Here’s an actual example of a golden cross on a chart in Pocket Option.
Before trading the golden cross using the strategy, make sure that you’re trading an uptrend market. The trend can be determined through the price movement. If the prices are forming new higher highs and lower lows, the market is moving at an uptrend. The image above shows new higher highs and lower lows therefore it is an uptrend.
Notice how every time the short MA crosses above the long MA, the price goes up. For such a case, the ideal entry point or buy point would be at a level above the short MA after the cross. Preferably, wait for a second candle after the cross to have a confirmation candle. The use of a confirmation candle is common among traders to verify the possible direction of a trend.
So, to trade a golden cross, make sure that the short MA crosses above the long MA, and wait for a confirmation candle that starts above the short MA. For instance, when the confirmation candle starts below the short MA, it would be best to wait for another confirmation candle above the short MA – as this may signal a change in trend.
For the case of a downtrend, make sure that new lower highs and lower lows are visible on the chart. To make the market direction more visible, simply draw a line connecting the price highs of the market as shown in the figure. The line that connects the price highs is a descending line thus the trend is a downtrend.
To trade a downtrend, look for the death cross signal when the short MA crosses below the long MA. Ideal entry points would be below the short MA after the cross. Of course, it would also be safer to use a confirmation candle to verify the trend. So, to trade the death cross, make sure that the short MA crosses below the long MA, and wait for a confirmation candle that starts below the short MA.
SMA 8/21 Trading Strategy is a powerful strategy to use especially when trading strong trends. It allows you to identify possible entry and exit points in the chart. This strategy is also beneficial for those who are trading at a lower time frame such as 5 minutes or less since it gives them a good assumption of the possible price direction. Nonetheless, this strategy is also like any other strategy – it’s not an ‘all-in-one’ strategy. Bear in mind that there are a lot of factors to consider when using any kind of strategy.
To know if this strategy is best suited for you, make sure to practice on a demo account before implementing it on your live account. Only through constant practice and consistent results with a strategy would you be able to improve your trading efficiency. Please share this article if you found it informative and helpful. For comments and suggestions, please fill out the form below.
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