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Thursday, June 5th, 2014 by Tim Lanoue
This 5 minute strategy only requires the use of one trading indicator and it is the Derivative Oscillator indicator. This indicator is a trend generating and trend finding indicator that applies itself directly into the price action of our targeted assets. The Derivative Oscillator is a unique technical analysis indicator solely because it uses the assets momentum to formulate and generate there signal output.
Before we can apply this indicator into our trading strategy we need to make sure that the time frame that we are watching our asset is set on 5 minutes, since this is a 5 minute strategy. Any time frame watched outside this will affect the accuracy of the signals generated. In addition, this indicator works best for high volume stocks and low volatility currency pairs. Some of the more popular high volume stocks that would work great for this strategy would be Apple, Nike, Exxon and Amazon. Low volatility currency pairs that we would want to trade with when using this strategy would be Eur/Usd, Usd/Chf, Nzd/Usd, and Usd/Cad.
Now that we have all the basics set up we can look into applying this indicator into a trading strategy. In the picture below you can see an example of how this indicator would look when applied to our trading strategy. If you look closely you can see how the derivative oscillator bars go in the same direction as the price action candles, or it will predict it and you can see how it changes and how the price also then follows suit. We have three trading opportunities in this example and all three of them end up as winners. In order for a trading signal to be generated we need to wait for one step to happen and one confirmation. The one step would be that there is a change in direction in our derivative oscillator indicator. Meaning that if there is a negative candle below the 0.00 value the next candle must be a positive candle, and vice versa. The confirmation is if the candle forming above or directly next to our derivative oscillator is heading in the same direction as that candle, if it is then we are good to place a trade in that direction for an expiry time of 5 minutes.
If you have been wondering what a Simple Moving Average is, then you came to the right web page. Today we are going to explain to you the fundamentals behind the Moving Average and how it can be applied in trading. Then we are going to discuss an essential binary options trading strategy which involves the use of the Simple Moving Average.
What is a Simple Moving Average (SMA)?
This is how a 5-period Simple Moving Average looks on a chart:
This is the hourly chart of the EUR/USD. The blue curved line is a 5-period SMA. This means that the Simple Moving Average on the chart averages 5 periods in order to point a value in a certain moment. Each place on the SMA responds to a price level according to the Y Axis on the chart (the price scale on the right). This level is an average of the 5 previous candle levels.
The Simple Moving Average could be adjusted to average a certain amount of periods according to your will. Remember: The more periods you include in your SMA, the more distanced and smoother the line will be. Also, the lag will be bigger too.
Since you have a raw SMA picture in your mind, let’s now switch to a more detailed explanation.
Calculating the Simple Moving Average
This is how the 5-period moving average formula looks like:
So, if the last five candlesticks on the EUR/USD chart are showing 1.1100, 1.1110, 1.1120, 1.1130 and 1.1140, our 5-period SMA will show a value of 1.1120. Not that hard, right?
The same applies for bigger period SMAs. If you use a 20-period SMA, the last 20 periods on the chart will be averaged the same way as with the 5-period SMA. In that case, the formula will look like this:
SMA20 = (n1 + n2 + n3 + n4 … + n18 + n19 + n20) / 20
For 50-period SMA, the formula will be:
Applying Simple Moving Average in Trading
Since the SMA is a lagging indicator which acts as a support or resistance, it is a very useful tool to confirm trends and reversals. If the price switches above your SMA, then you get a signal for an eventual bullish trend. If the price goes below your SMA, then a bearish trend might be on its way. The higher period your SMA is, the more accurate your signal will be. However, higher period SMAs put you in the market later, because the lag is bigger. Have a look at the image below:
Simple Moving Average: A Trading Strategy That Works
The SMAs can be combined on the chart. Different period SMAs act with different “speed” on the chart. Higher period SMAs react slower to price action, while lower period SMAs react faster. This way, two Moving Averages on the chart would often cross and interact with each other. This is how traders generate signals. If our two SMAs cross upwards, we get a signal for a bullish trend. If the two SMAs cross downwards, we get a bearish signal. In this manner, we will buy when the two SMAs cross in bullish direction and we will sell when the two SMAs cross in bearish direction.
If you are getting confused, this image will make it all clear for you:
This is the H4 chart of the Gold for Sep 3 – Nov 3, 2015. The blue curved line is a 20-period SMA and the red curved line is a 50-period SMA. Notice that the blue 20-period SMA moves faster than the red 50-period SMA. This is so because it is a smaller period SMA and has less lag. Thus, this is the faster SMA on the chart.
The green circles show the moments where we open a new trade with closing the previous one. The black arrows show when the SMAs are tested as support or resistance.
The image shows 5 trades based on crossovers of our SMAs:
Trade 1: We sell when the two SMAs cross downwards. We hold until they cross in the opposite direction. We generate a profit equal to 1.12%.
Trade 2: With the closing of the first trade, we open a new trade, which is long (we buy). We exit the trade when the two SMAs cross downwards. We generate a profit of 0.96%.
Trade 3: With the closing of trade 2, we enter trade 3, which is short (we sell). We hold until the SMAs cross upwards. Unfortunately the signal is bad and we accumulate a loss of 1.66%.
Trade 4: Closing the losing trade, we enter a new long trade. We hold until a downward SMA crossover. We generate a profit of 1.37%.
So, if we have a bankroll of ,000 leveraged by 1:100, we would have a buying power of 0,000. Let’s see what happens if we invest 5% of our buying power in each of these trades:
Bankroll: ,000 / Buying Power: 0,000Bankroll: ,060 / Buying Power: 6,000Bankroll: ,110.80 / Buying Power: 1,080Bankroll: ,018.60 / Buying Power: 1,860
Bankroll: ,088.37Total Profit: .37
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