Today’s strategy is so simple.
But make no mistake not using it as illustrated in this post. You may lose all your funds. And I doubt you want that, do you?
That’s what I thought.
That said, if you are looking for a simple but effective strategy to trade on Olymp Trade, then this is your post.
I will walk you through how to combine moving averages and the RSI indicator to increases your success rate in FTT trading.
Without further ado, let’s create a foundation for our strategy.
Understanding Moving Averages | What is a moving average?
Moving averages are technical analysis tools frequently used in forex trading to smooth periods, identify trends and pick trend reversal points (especially if used with support and resistance tools).
Simply put, moving averages identify the direction of the prevailing trends, help find support and resistance levels, and generate buy and sell signals.
Ideally, the MA is derived by calculating the average of price actions over a specified period of your choosing. Often 10, 50, 100, and 200 day periods.
Interpreting moving averages on Olymp Trade.
Right off the bat, periods of moving averages you select will majorly depend on your trading objectives.
What do I mean?
Well, if you are going for long-term trades on Olymp Trade, you should use long-term moving averages.
On the flip side, short-term trades are perfect for short-term investors.
Now, when it comes to trading signals, moving averages are the best.
They generate signals on their own (as a single MA) or when two moving averages cross over.
With that in mind, a rising moving average is an indication of an uptrend, while a falling moving average is a signal of a downtrend.
On the other hand, when two moving averages, typically a short-term moving average crosses above a longer-term moving average, it is a confirmation of an uptrend (also known as bullish crossover).
On the flip side, a bearish crossover confirms a downward movement. Here, the shorter-term moving average crosses a longer-term moving average top-down.
For this strategy to work, you need to pick a moving average of your choice (EMA, SMA, SMMA, or WMA).
What are some of the most popular moving averages on Olymp Trade?
- Exponential Moving Average – gives more weight on the most recent data. Learn more…
- Simple Moving Average – calculated by computing the average of price points over a specified period. Learn more…
- WMA – Weighted Moving Average. Learn more…
- SMMA – Smoothed Moving Average.
These are not all the moving averages available on Olymp Trade.
You should pick the one you are most comfortable with.
Moving on with the trading strategy: –
What is the Relative Strength Index (RSI)?
The RSI is an indicator used to gauge market momentum.
In Olymp Trade, RSI oscillates between points 0 and 100, where values above 70 indicate that the underlying asset is overbought and values below 30 indicate that the asset is oversold.
As such, the market could experience a reversal or price pullback at any time.
Besides the two levels, RSI has a third line – the 50 line.
When the RSI is above the 50 line, it is an uptrend signal. On the other hand, if it is below the 50 mark, that is a downtrend signal.
Additionally, the RSI could create divergence signals that you can use to tell entry points on Olymp Trade.
- RSI Bullish divergence – occurs when the RSI indicator enters the oversold zone (below 30) which is followed closely by a higher low matching lower lows in the asset prices.
This confirms a bullish momentum. As a result, open a long buy position once the RSI crosses above the oversold zone
- RSI Bearish divergence – this is as a result of RSI moving to the overbought territory, followed by a lower high price candle matching higher highs of the price.
You can learn more about the RSI indicator here.
With that brief introduction of moving averages and the RSI indicator, you are ready for the next step in creating the Olymp Trade trading strategy by combining the two indicators.
The trading strategy explained.
This strategy you are about to use leverages both indicator’s signals to create a seamless trading system on Olymp Trade.
Now, we are going to examine entry, stop loss, and of course, take profit conditions for the strategy.
As an entry signal, we are going to rely on two forms of moving average crossovers (EMA and SMA).
- When the underlying asset’s prices are trading above or below the moving average, it is a signal that the support or resistance levels have been breached.
As such, a shift in momentum is looming. And you can now enter a short or long position.
For example, when the prices close above the moving average, open a buy position.
Moving average crossovers.
These types of crossovers happen when you are using two types of moving averages with different ‘speeds/periods.’
When the short-term moving average (EMA) crosses the longer-term moving average (SMA), you can immediately tell in which direction the market momentum is moving.
For example, when the short term moving average crosses above the longer moving average, that is a buy signal right there.
And when the shorter moving average crosses the longer moving average top-down then that’s a signal to SELL.
Confirming the signals.
You can use the RSI to confirm the moving average signals as shown in the images above.
As we had mentioned earlier, the centerline for the RSI is the 50 line level.
Now, when the RSI is above the 50 line, it is a signal of bullish momentum.
On the flip side, if it goes below the 50 line, it indicates a bearish momentum.
As a confirmation tool:
When the moving average gives a signal, be sure to look at the RSI position. This way, you can instantly determine whether the signal is strong enough to warrant opening a position or not.
When the short-term moving average crosses below the long-term moving average, it generates a sell signal.
Do not enter the position, yet.
Check the RSI. If it is below the 50 line, open the sell position.
Where to put stop-loss orders if you are trading Forex.
It is true, even with the best trading strategy, sometimes trades can go south.
When that happens, you need a sound strategy to exit such trades to minimize losses. Gladly, the moving averages can help.
You see, moving averages act as support and resistance levels. As a result, you should place your stop-loss orders above or below the identified levels.
If the asset price closes below the moving average, put the stop loss above it since it will now act as a resistance.
Where should you take a profit?
This is where the RSI comes in.
Since the indicator is showing you the oversold and overbought levels, it also shows looming reversals when these levels are breached.
As a result, if you have opened a buy position, consider holding it until the asset enters the overbought zone then take profit and exit.
Conversely, with an open sell position, ride on it till the index breaches the oversold territory, take profit and exit.
Was this article helpful? Try the strategy on a demo account before going live.