This is a post I have been pretty excited to get writing and to share. This is one of my most frequently used long term trading strategies that is designed to capture every big long term price move in the market. This system has been very profitable for me quite consistently. The whole idea is never to miss a trend. I am going to give you all the rules to this system as well as show you an example trade with screen shots and my results from back testing this trading system over 15 years worth of data. First off, here are the rules of the system.
The 50 day moving average trading system rules
We use the daily charts.
Simple Moving Average 50 period crosses over the 150 period. When this happens we will look to making a trade in the direction of the cross over i.e. if the 50 period moving average crosses up over the 150 period moving average we will look to take a long trade. First we wait for a pullback in price, and enter the trade on the next bullish candle (if trading long) or bearish candle (if trading short).
IF the crossover happens as price is already pulling back from a move in that direction we simply wait for the candlestick confirmation and enter there.
IF the first trade fails, we will look to re enter, but only if price breaks through a key resistance point in the direction of the trade. We do no simply jump in on the next bullish/bearish candlestick. We do this because we try to get a confirmation that price is in fact going to continue in that direction and not just enter a side-wards range.
Where to place the stop loss?
The stop loss should be placed below/above the last swing low/high (depending on which direction you are trading). This is the one part of the system that in very few cases may need some human judgement. If the last swing low is so far away that you are risking maybe 500 pips on a single trade, I would perhaps go half way. You can safely suggest that if the price falls 250 pips from where you first entered, that the price is not heading in the direction you thought it would, and its time to get out.
If price heads in your desired direction we will continue trail the stop loss using the swing high/lows. e.g. if price breaks out of a consolidation in the direction you want, the latest high/low of that consolidation will become your next stop loss.
Adding to the position
IF the price takes off from your entry in the direction you desire we will be looking at the next pullback to enter again. Wait for a consolidation and a confirming candlestick to place another trade, effectively adding to the size of your trade. Move the first trades stop loss to break even and place the stop loss for the second trade below the last swing low/high.
If price takes off again in your desired direction we do the same. Wait for a consolidation and confirming candlestick to place another trade. Move your last trades stop loss to break even. Move your first trades stop loss to below/above the last swing high/low and place the stop loss for this trade at the same place.
At this point you should have one trade in profit, one trade at break even and one trades worth of risk.
We do not add to the position more than twice after the initial trade. No more than 3 trades open on one currency pair at a time.
What pairs do I use to trade?
We can trade the 50 day moving average strategy across all major currency pairs, although some yield better results than others. The EUR/USD has performed the best for me without a doubt, probably because it is traded so heavily by everyone that price patterns really do play out nicely and trends have tended to run quite long. In my experience, anything paired with CHF has not performed that great using this system, but I would still not write it off. Catching one major trend nicely can make up for even ten losing trades.
Back-testing the strategy
Although I have used this system for a good while and have plenty of results and stats in my live trading account, they are kind of mixed up with results from other trading systems I use too. In this case I will use Forex Tester 3 back-testing software to test this strategy over 15 years of data for the currency major currency pair EUR/USD.
I would always suggest before trading any strategies on a live market (even the ones I am showing you now) that you invest in a simple back testing software and check for yourself that the system is profitable. I have included a link to the back testing software of choice that I use, they offer a free trial so you don’t have to part with cash if you don’t like it. There are also other good software on the market, but I find them a little too complex.
How to ride a trend and example trades
I will show below exactly what happens and how play it out when the market starts to trend. As you can see from the image below, the 50 day moving average has moved above the 150 day moving average and price has pulled back. Upon seeing the bullish candles we enter the trade.
Price does not take off straight away from this point, it goes side-wards for five days before taking off in the direction we would like. Price then consolidates a little more and gives us another bullish signal. At this point I will add to the position by placing another trade as per the instructions mentioned earlier. I move the stop loss of my first trade to break even and put the stop loss for this trade below the last swing low.
Looking at the chart below, we can see that price takes off again in our direction. We add to our position again for the final time during this trade. Now we have 3 positions open. One at break even, one in profit and one trades worth of risk.
Price continues to trend nicely in our direction three position open, all in profit.
Finally the stop loss is hit for all three trades. We exit with three winning positions.
the trend isn’t over!
Although we are out of the trades, the trend isn’t over, the MA’s are still pointing in the right direction so we will look to taking another trade in that direction if price breaks out of a significant trend line as per below.
Success! entering here landed us with another three profitable positions, following the same system as before.
Below is a snapshot of my trades during this trade so far. Bare in mind, for the sake of testing, my lot size has only been 0.10 throughout. This profit would be around $24,000 for anyone trading full lots.
The trend still wasn’t completely over. The snapshot below shows how the up move on this pair continued and we had more opportunities to get in again for some profitable trades (and a few small losing trades).
In this particular case the trade went really well. It doesn’t always happen as smoothly as this particularly when markets are moving side wards for a while. But it just shows that catching one major trend like this can more than make up for the periods of side wards movement. The trick is to make sure you never miss a trend by not missing any signals. Consistency is the key. Even if the market is clearly going side wards and you get a buy or sell signal, take it, because that can be the start of a major trend like this. If not, you make a small loss and wait for the next opportunity.
See below the trades from riding this trend. There are a couple of losing sell positions in there from when the MA’s crossed over in the other direction. These trades failed for a small loss and when we got the signal, we entered back long.
The images below highlight the stats of my test.
And finally what my equity was looking like throughout the test. As you can see there are periods of drawbacks during the side ward moving times of the market. And big profit spiked when the market is trending.
How much should you be risking
For the sake of making testing easy I just risked however many pips it was from the entry to the last swing high/low. How I would normally calculate risk is by adjusting my lot size so that the loss would equal about 2% of my starting capital. Everyone has different opinions and comfort levels when it comes to risk.
I hope the 50 day moving average strategy was helpful for you. I know that it is quite a lot to take in. If you would like to ask me any questions or you are interested in being tutored by me on how to trade this system please feel free to contact me using the contact form below.