My SMA & Price action method

Beginner Questions Candlesticks, Chart Patterns, and Price Action
1

Firstly I’d like to say a big hello to everyone, all the way from the canary islands :23:

I’ve been researching FOREX for the past 3 weeks and think I have found a system that will not only work, It will help me, and others trying to learn price action and candlestick patterns, how to trade with price action.

Now before I explain my method, [B]I want a lot of money for this…[/B]

Only joking lol

I have only tested this on paper so far and will be testing this on my demo account for a while so I will post results, good or bad, and you can see how I am doing and hopefully advise, criticize or if you just want a bit of banter, that’s okay too.

[B]What you need:[/B]

To start with you will need to place…

10 period simple moving average
20 period simple moving average
and a 200 period simple moving average
on a 1 Day to 4H Chart

[B]How I [I][U]think[/U][/I] it will work:[/B]

So to start with we look at the 200 SMA. If the 10 & 20 SMA is above it, we are going to want to buy. If the 10 & 20 SMA are below it we are looking to sell.

Next we wait to see the 10 SMA cross the 20 SMA. So if they both below the 200 SMA and the 10 SMA drops below the 20 SMA we are going to look for a sell signal.

The sell signal will be one of the candlestick patterns that signal a move is immenent…

A Bearish Engulfing pattern
Shooting Star pattern
Dark Cloud Cover pattern
Doji

4 simple patterns to memorise and look out for as you start. Over time you will learn more (Thats my plan anyway)

All of the above is true for the opposite bullish signal too but you want to look out for…

Bullish Engulfing pattern
Hammer pattern
Piercing pattern
Doji

[B]How to take profits:[/B]

What I did was, on a sell position, I placed my stop loss 5 pips above the high of the bearish candle that just closed and moved it down to the top of every following [B]BEARISH[/B] candle. Now Ive highlighte the bearish candle there because I found that if I did the bullish candle in a bearish move, the next bearish candles high would trigger my stop and then move down further and casue me to miss out on pips so only move it to the top of a bearish candle on a sell order. Same goes for the opposite.

Once your stop has hit, sit back and wait for your next opportunity to enter. Stick to the rules and you should profit even if you have more losses than winners. My worst loosing trade was 83 pips down :frowning: My best winning trade was 324 pips up!!! I finished the 10 trades with a total profit of 506 pips from 5 winners and 5 loosers. To me thats not bad. I need to test it further but early signs are good.

Note: I am only using the SMA to show me what to look for, not as entry signals. The signals come from candlestick patterns only!! My favorite one up to now is the engulfing pattern.

Please comment and good luck
:slight_smile:

2

Something I forgot to say…

I only ever place an order that is 1:10 of my current account so if I have €1000 in my account my order will be for 10K if it goes up to 1700 id place an order for 17K That way I think I should avoid the dreaded margin call long enough to make my profits back. I think! We shall see

3

Something else I forgot was that I had 3 loosing positions in a row so I asked myself why and realised the 20 SMA was running flat. If this happens just wait until it starts to move again and continue. I quickly got 3 wins and 1 loss straight afterwards.

4

Ok (especially since nobody else did yet, to my slight surprise) … :slight_smile:

I think this is all based on [I][U]far[/U][/I], in fact [I][U]incomparably[/U][/I] better parameters and realities than the system you were looking at 10 days ago (about which I was genuinely surprised to see one senior member/contributor here comment that it looked “viable”: it looked exactly the opposite, to me). So IMO you’ve [I]clearly[/I] moved in the right direction.

So, you’re using candle-patterns as entry-parameters, but taking entries only at times permitted by your perception of the underlying trend within the time-frame you’re trading from (as determined by relative moving average positions). That all sounds good, and viable, and commendable in principle. At the very least, the underlying objectives are good: you’re basically using price action to trade, while also ensuring that you trade “with the trend”.

I think you may need to take care to distinguish between “a good entry-method” and “a good trading-system”, though. I’m mentioning this protectively in case your ongoing testing of this is slightly disappointing. If that happens, it will perhaps be because of the trade-management techniques being “second-best”. The underlying idea is [I]still[/I] a good and valid one, even if your overall results, with all the parameters as they are now, don’t quite turn out to be what you hoped.

I know you need the EMA-10 and EMA-20 to be both above the EMA-200 to open a long trade (and vice-versa), but do you also need them all to have an upward gradient? (I suspect that might be a useful parameter to add to your list of requirements).

I’m also wondering whether something like EMA-15 and EMA-40 might be more suitable parameters. Of course, it’s all too easy to throw up ideas like this, and all too difficult and time-consuming to backtest them thoroughly and methodically, but I do have a reason for suggesting it.

Have you run a long-term backtest over at least a few months’ data?

What [U]time-frame[/U] are you trading from? (A little difficult to know exactly what else to ask/observe, without knowing this!).

I follow the principle, but without knowing the time-frame, it’s not possible to judge how much 5 pips is, proportionally. (I’ll be honest and say that I instinctively wonder whether you may be making your stops, overall, a little too tight, here?)

I didn’t follow you, here. I’m hoping you didn’t mean that your position-sizing is 10% of your account? (If you did, [B]this may help you[/B]).

Without knowing your leverage, this in itself doesn’t tell us much? (Unless I’ve misunderstood you!).

[B]Question[/B]: have you thought about relating the trade management criteria to the current volatility (perhaps as evidenced by an ATR?) rather than having absolute, numerical parameters for them? I suspect that might be helpful.

Good luck and good wishes for this - looking forward to seeing updates.

If it doesn’t quite all go according to plan, right out of the box, in my opinion that would be an indication to start backtesting different parameters, rather than throwing the idea away (but you were certainly right to do that with the last thing you were looking at!).

Trade management is typically considerably more important to the bottom line than the exact entry-method. :wink:

5

PS: Sorry, I just realised you said “SMA”, not “EMA”. That’s fine, too. :slight_smile:

Which Canary island, by the way?

6

Awesome, a fellow SMA trend trader!

What made you decide to use this instead of the one with Heiken Ashi candles? I personally like this better as the parameters look simple and newbie-friendly.

How far back have you backtested the system? Can’t wait to see more updates on this!

Huck

7

Wow thanks for the interest. I’ve looked at doing all sorts and this makes more sense than the last way I looked at.

To answer your questions I’ve replied withing the quote. Sorry for using capitals but wanted to make it clear where I replied. I live in fuerteventura hence the name Majorero. It’s canarian for someone from here.

8

To be honest I didn’t have enough faith in it and to succeed you need faith and belief in your system. I’ve spent every free second of the past 3 weeks reading about forex and still have a lot to learn but faith and belief are something I learned a long time ago. If you think you can, believe you can and have faith it can be done, it will be done no matter what ‘it’ is.

9

Ooh, I see: didn’t know that. (I’ve only been to Tenerife and Gran Canaria. I like the north side of Tenerife very much: Santa Cruz and especially Puerto de la Cruz.)

The realisation that you’re trading from D1 charts has answered many of my questions - thanks!

Ok, I think I understand … I was asking about position-sizing. Here’s the thing: your stop-loss varies according to the length of the previous day’s candle, right? I was alluding to the fact that you might want to have a position-size (or in any case a “maximum position-size”) which you work out according to the size of the stop-loss, so that if the trade turns against you and gets stopped out, one individual trade can’t ever cost you more than “[I]x[/I]”% of your account. I was just checking that you’re not actually risking 10% of your account on any individual trade (which could eventually be suicidal, even the system’s a really good one!); but I see now that you’re not. :cool:

Good luck with this - watching with interest. :slight_smile:

10

Right its time to get serious!!!

My first month of learning forex has ended up with me €600 down on my demo account. Not a good start but at least I avoided the dreaded margin call. This has been achieved (if you can call it an achievement lol) by testing various different indicators, realising those indicators only show what’s already happened which can be seen from the charts alone anyway, and also from fiddling with trades, trading outside of any plans I’d made and letting fear get to me due to having no confidence in what i was doing.

All that has changed now!! I have a plan in place and I’m going to stick to it. I have faith in it so i wont let fear force me to close a loosing trade again - once the stop loss is hit, its hit. The profits and losses will sort themselves out! I’m going to do some back testing today so will post those results later.

I’ve started a new demo account to forward test this plan with and will repeat this process until January. If all 3 months end profitably I will go live :smiley:

I’m also going to try the 15 - 40 - 200 SMA theory too but I wont be incorporating the RSI indicator at all due to it being another lagging indicator and not part of what I aim to achieve. Don’t forget the SMA indicators are only used as guidance. My ultimate aim is to see for myself what candlestick patterns i can use to see opportunities to enter the market without the need for any indicators at all. Keep things simple and I cant get lost.

I just want to finish by saying thank you to Lexys for your words of encouragement and advice. I really appreciate it :smiley:

11

We’ve all been there; really.

You should - it looks a very reasonable one, to me. Naturally it’s dependent on interpretations of candle-patterns, but that’s in its favour, really, and implies you can only improve at it (and its results improve with you) as you gain experience. Confidence also improves results. :wink:

It [I]may[/I] help. I just think 15/40 or even 15/50 is going to give you a considerably more reliable trend-determination than 10/20, which will cross over far more often, especially in markets that aren’t [I]really[/I] trending at all. It’s certainly not going to be worse, anyway. My guess is that you’ll get fewer trades but a higher win-rate which will more than compensate, as well as giving you a smoother equity-curve. :wink:

Best approach. It takes most people [U]many[/U] months (or years!) to learn that indicators derived from previous prices have no predictive powers. And the longer it takes them, the harder it often becomes for them, I suspect, because the belief/hope becomes pretty entrenched and people become increasingly reluctant to give it up and walk away from such a big emotional investment.

12

Okay so i just randomly scrolled through the charts and started my test from 04/12/96 and I have to say I am made up with the results for that year.

Over all I would have made 9 trades. I forgot to note the exact dates but the figures are as follows…

Sell - 1.2689 SL Hit - 1.2691 (-2 pips)
Sell - 1.2542 SL Hit - 1.1824 (+718 pips)
Sell - 1.1491 SL Hit - 1.1361 (+130 pips)
Sell - 1.1551 SL Hit - 1.1337 (+214 pips)
Sell - 1.1336 SL Hit - 1.1316 (+20 pips)
Sell - 1.1081 SL Hit - 1.0756 (+325 pips)
Sell - 1.0961 SL Hit - 1.0996 (-35 pips)
Buy - 1.1561 SL Hit - 1.1435 (-126 pips)

So all in all for that 1 year period I would have made a total of 1,478 pips profit! I don’t know if that’s good or not for a years worth of trading but for 9 trades Im pretty sure it is. Please correct me if I’m wrong.

I’ll be back soon with the figures for how much money that would actually equal to.

Edit: so if I started with €2,000 and only traded at 1:10 leverage then my high would have been €7,593.40 and I would have ended with a total of €4,410.80 profit for that year. I dont know if thats good or not.

13

As I was just doing that test I realised I was missing out on valid trades in the opposite direction that would have been profitable too, but because the 10 & 20 SMA was still below the 200 SMA I didnt enter. I might try again from a different start point without the 200 SMA and use the 15 & 50 SMA instead. I know the trend is your friend but I still think I could have done better or is that greed getting to me?

14

Im not as impressed with this method. 14 trades total. 843 pips total profit at the end. It could be the time frame that caused it but I dont know. I’ll see how the first way goes this month on my demo account and take it from there.

15

You’re dealing with [B]far[/B] too tiny numbers of trades for these “averages” to mean anything much, honestly: you need at least 200-300 trades before you can meaningfully work anything out, expecting it to have much predictive value.

I appreciate, of course, that trading an “occasional” system on daily charts means that you can’t ever realistically compile those figures!

So … from a [I]trading[/I] perspective, might it be time to look at hourly charts, instead of daily ones? From something close to an [I]investing[/I] perspective, of course, daily charts look great for this (albeit on [I]tiny[/I] numbers of trades, so far!).

When you look at results, and work out “averages” from them, to see “what’s probably worthwhile”, you should exclude the top and bottom result from a small number, to remove “outliers”. Out of your 9 results above, the +718 trade might just be “one freak result” the like of which will never be duplicated. So you exclude that one, and for balance, you exclude the worst result (-126 pips) as well, and average the other 7 trades.

That gives you an “expected average” of +93 pips per trade instead of +138 pips, I think (see what a huge difference a “freak result” can make?). Still absolutely [I]tremendous[/I]-looking results, of course … but [B]way[/B] too small a sample to be statistically relevant.

When I see results like that, all my instincts are “Too good to be true”, and I start looking for “where the mistakes might have been”. But there may be none: it might just be a very good method indeed. But it really isn’t possible to judge this anywhere near reliably on the basis of such small samples.

I’ll be honest: when I asked you what time-frame you were looking at, I was expecting you to say 5-minute charts or 10-minute charts, or something like that, not daily charts. I’m not for a moment suggesting there’s anything bad or wrong with trading from daily charts at all, needless to say, but without decades-worth of results to analyse, it’s going to be hard to analyse “back-testing”? (And markets change so much, over decades, that that can raise new problems, too.) I’m wondering whether you might possibly improve the statistical significance by testing a large number of other currency-pairs as well? But maybe not very much, since they’d perhaps all be “correlated sources”, more or less, rather than “independent information”, given the close correlations involved in currency-trading?

This book will help you a [U]lot[/U], if you’re interested: [I]Profitability and Systematic Trading[/I] by Michael Harris (Wiley 2007).

16

Okay thanks for that. The problem with using the 1H time frame is my current job. While I can get FXCM on my phone, the wifi in work is dodgy at best and I can be sacked for using my phone on shift. Seeing as I’m manually moving my SL I’d need to 100% be able to access the charts at the close of every candle. At this moment I can only do that on the 1D chart. I suppose I could up my position to 1:20 instead of 1:10 which would give me a higher pip price. It’s either that or quit and get earache from my wife lol

17

Or you could purchase a wifi dongle on a USB drive - internet fixed. Personally working in a day job and combining it with the potential to trade which intervenes with your day job is not a good start. Trading is not easy, and lacking anything other than 100% dedication prior to having a solid tested and proven to be profitable trading methodology is going to end in tears.

18

Like I said, I can be sacked for using my phone on shift. Plus having a laptop set up on the bar top isn’t going to go down well with my boss. The ONLY way I see around it is by going for a cigarette break every hour and spending 10 minutes outside the bar next door who’s wifi is a lot better than ours so I can catch the close of every hour candle. I think I’d get away with that.

I’m going to update my introduction post so you can see a clear picture of why I am doing this. Thanks for the idea though. I’ll keep that in mind when I’m trading from my yacht one day lol

19

Why not automate the strategy you outlined in your first post? Then you could adapt it to any time frame and still keep your day job. :21:

20

How would I do that?