The Simple Moving Average Trading Strategy consists of 2 or more simple moving averages. All the moving averages used, have different input lengths. But the most common simple moving strategy, is the 9 and 21 period moving average strategy. In this strategy, a trader uses the crossover of the moving averages, to find entry and exit signals. Since simple moving average smooths out price data, you can gather a lot of info about the price direction. With the help of a simple moving average, even your dog can identify if the price is trending upwards, downwards, or is in a range. But if you combine two simple moving averages that smooths out price data, you can create a simple but effective trading system.

 

Here’s how the SMA crossover strategy goes. When the 9 period SMA, crosses above the 21 period SMA, it’s a buy signal.

 

Similarly, if the 9 period SMA, crosses below the 21 period SMA, it’s a sell signal.

 

Here, the 9 period simple moving average, is the fast moving average. And the 21 period SMA, is the slow moving average.

 

Now, if you take trades using this SMA crossover setup, where should you put your stoploss?

 

Well, in the long setup, when the 9 SMA crosses above 21 SMA, you can set your stoploss just below the swing low.

 

Similarly, in a short setup, when the 9 SMA crosses below the 21 period SMA, you can set your stoploss below the swing high.

 

Now, you can trade using this simple setup, but it’s not very effective, and I don’t recommend it, here’s why.

 

You see, if you can find where price wants to go in the long run, your job is half done. If you can identify where the price is trending in the long term, you are one step closer to making good money in trading. That’s because, when price is in a trend, it tends to move in one direction for a long time. If you take trade in the direction of the long term trend, you can achieve higher and better reward to risk ratios. In simple words, you will make more money. And you can easily find that direction of the long term trend, using another moving average. Usually, I use 200 Exponential moving average to find the long term trend. But this time, since the topic is about simple moving averages, I have used 200 period simple moving average to find the long term trend direction.

If price is above the 200 SMA, it’s an uptrend, and we should only look to buy. If price is below it, it’s a downtrend, and we should only look to sell.

 

So here’s how our complete modified Simple Moving Average Crossover strategy goes.

 

Only take buy entry signals, when 9 period SMA, crosses above 21 period SMA, and price is above the 200 period Simple Moving Average.

 

Similarly, only take sell signals, when 9 period SMA, crosses below the 21 period SMA, and price is still below the 200 period simple moving average.

 

I have tested this Simple Moving Average Crossover setup 100 times, with just few simple tweaks. These tweaks are there to make the strategy more effective in the long run.

 

When the crossover strategy gives a buy entry signal, the candle that is giving the entry signal, should be above the moving averages. If it is slightly touching it, it’s still a valid setup. Furthermore, the  entry candle has to be above all 3 moving averages.

 

Similar thing applies to the short setup. When the crossover strategy gives a short entry signal, the candle that is giving the signal, should not be touching the moving average. A slight touch is fine. Also, the entry candle has to be below all 3 moving averages.

 

So, I tested Simple Moving Average Crossover Trading strategy 100 times, and here’s what I found out. I’m using the Official Trading Rush App for backtesting this strategy. You can use it while testing your trading strategy as well. It will calculate the win rate, the number of winners and losers, and other data in just one click. Saves a lot of time. You can download the Official Trading Rush App from the Google Play Store, or using the link in the description.

 

Number 1. The best part about the SMA crossover strategy I found, was the ability to show the end of a pullback, or at least that’s what I thought at first. Let me explain. You see, by adding the 200 period Simple moving average, we have turned this strategy into a trend following strategy. The 200 SMA is showing the trend direction, and the 9 and 21 SMA crossover is giving the entry signals. Most of the time, the SMA crossover setup gave good entry signals at the end of the pullback. But that was also a kind of disadvantage.

 

Number 2. Unlike Exponential moving average, where latest candles are given more priorities while calculating the average. In a Simple Moving Average, all the candles are given equal priorities while calculating the simple average. Because of this, the SMA crossover strategy was giving late entry signals than the Exponential moving average crossover strategy. And on top of that, all moving averages are lagging indicators. They possess no ability to predict the future movements.

 

When there was a good long term trend going on, the signals I got from the SMA crossover strategy were profitable, but sometimes, the signals were so late, that the trend was already over.

 

Number 3. In this back test, I lost most number of trades, when the long term trend was not strong enough, or was trending sideways. This could be easily avoided by using some other indicators, or by simply looking at the 200 period moving average. If the moving average is looking flat, there is no trend going on. I have also made videos on other indicators that identify if the market is trending or not. Check them out if you want.

 

So after testing the Simple moving average crossover strategy 100 times, I found that the win rate of the strategy is approximately 48 percent. What this means is, the SMA crossover strategy, and the Exponential moving average crossover strategy, have a very similar win rate. Both of them are profitable strategies. Since most people will use a Reward risk ratios of higher than 1, I used a 1.5 to 1 reward risk ratio, and because of that, I was able to make money, even with a win rate that is less than 50. This is not the best strategy we have tested so far. In this back test, I won 6 times in a row, and lost 6 times in a row.

Other indicators performed way better than this. If you want to know win rates of other trading strategies, check out other videos on the Trading Rush Channel, or on the Trading Rush Website. And if you want to use the Trading Rush  App while testing your strategy, feel free to do so. You can download it from the Play Store, or using the link in the description.

 

That’s all. Now you know more about the Simple Moving Average Crossover Strategy. Like the video if you liked it. Subscribe to the Trading Rush Channel if you want to see other strategies tested 100 times, to see their real win rates. And thanks to everyone for watching.