Pipsqueaks #19 – Part 1: Build Your Own Strategy

Today is my first day back to computer land; I’ve had a week or more where I needed to spend some time away from computers, and books, and trading, and bright lights and all things interesting, as I was struggling with a rather nasty inflammation of the glands in my eyes. Thank goodness for radio! Gratefully, I’m on the mend at last I can get back to doing a little trading and writing and such. Last time out in PS 18 we looked at some strategy ideas utilizing a ribbon; today it’s all business (as I’m out of jokes) as we continue to explore setting up your own charts.

Let’s start with a simple chart and the familiar MA 2 X 14 ribbon from last time on a one hour chart:




Now this ribbon is merely two moving average tied together – in this case it is set to a 10 exponential moving average (red line) and a 25 exponential moving average (blue line). The orange line is a 50 exponential moving average (EMA henceforth). More about the 50 EMA later. Let’s look at a few things that this chart tells us. On the left side of the chart, we see price action in a nice downward trend, where the candles are mostly below the red line and with a mostly downward trajectory. During this downward move you will notice that the spacing between the red EMA and the blue EMA gets wider as the market trends. As the market levels off (starts to consolidate), you see price action encroaching the shaded area between the moving averages as well as the red and blue lines move closer together. You’ll also see price spike (briefly) through all three EMAs, yet not enough for the 10 EMA to successfully cross the 50 EMA. After the spike, price action continues to cross the shaded area of the ribbon. So what’s all this telling us? There are several points we need to take note of in terms of interpreting the chart. First off, when the 10 EMA crosses below and continues to move away from the 25 MA, that’s indicative of a strong “short” trend, typically with the candles well below the red 10 EMA line. Wouldn’t it be nice to take a short position while the market is trending down? Well, it would be, but you want to be mindful of when you enter – see the chart below:




Let’s suppose you enter a trade at the red arrow which is pointing at price action at the top of the hour at the close of the bear bar. What happens? Well, right away, the trade goes against you some 38 pips and you are stuck with this nail biter until the next day before you max out at +20 pips (and of course you don’t get 20 pips because you closed your trade either before or after the market reached its low point). So what’s the takeaway here? In a situation like this, you want to enter your trade when price action is close to the lower (red) MA. Had you done that, when price action was at the top left corner of the chart, you’re looking at a gain of about +90 pips. Entering at the red arrow, with price action far away from the 10 MA, there is a greater probability of catching some unwanted drawdown as the market pulls back closer to the ribbon. In this example, there are several opportunities for a good entry near the 10 EMA over a span of several hours. Several other things to take note of that reinforce a strong short position: price action is below the 25 and 50 EMA, and both EMAs are sloping downwards.


The chart we’re looking at is based on an old textbook strategy basically utilizing three moving averages – a 10, a 25, and a 50 MA. The idea is that when the 10 EMA crosses below the 25 and 50 EMAs, you take a short position, and when the 10 EMA crosses above the 50 EMA, you take a long position. A moving average cross strategy is a very simple and commonplace strategy as well as reliable method for placing trades. Many experienced Slick Traders reading this may recognize that this is very similar to the famous “Foltron” EA strategy, which basically places trades when a 13 MA crosses a 20 MA. What’s really neat here is that the Foltron EA can be reprogrammed to accommodate other moving average cross strategies, like the one above. I guarantee you it’s no fun to stare charts for hours waiting for moving averages to cross, and more than likely you will get preoccupied doing other things and you will miss your opportunity, or the cross occurs in the middle of the night, and again you miss out. If I wanted to, I could fully automate this trading activity with an expert advisor. For the time being, I just want to build a strategy, starting with something simple to something a little more sophisticated. As it is I would just like to get an alert when the moving averages cross. A good tool for doing just that is something I’m borrowing from the Foltron setup, the “Slick Trade – Follow the Trend” indicator. To see how that works out, you’ll have to stay tuned for part two of this column. Until then take care, and happy trading!


Miss out on last week’s Pipsqueaks article?  CLICK HERE to access

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