Simple Moving Average – Top 3 Trading Strategies

1. Going with the Primary Trend: Identify a stock breaking out strongly, apply SMAs (5, 10, 20, 40, 200) to find the best fit, wait for the price to test the SMA and confirm the trend direction, then enter the trade. An example with TIBCO (TIBX) on June 24, 2011, shows a breakout with a 10-period SMA gauging trend strength, but warns against using SMA alone for exact buy/sell points due to choppy trading risks.
2. Fade the Primary Trend Using Two SMAs: Select two SMAs (e.g., 5 and 10), ensure the price hasn’t touched them excessively in the last 10 bars, wait for the price to close above/below both in the counter-trend direction, then trade. An FSLR example highlights a counter-trend trade after a 4% gap, with a 50% chance of gap filling, but cautions about risks if the trend resumes.
3. SMA Crossover Strategy: Use two SMAs (e.g., 10 and 20) to trigger trades when the shorter crosses the longer (buy on cross up, sell on cross down). An Apple example from April 2013 shows a 10-period SMA crossing above a 20-period SMA, leading to a price rise from $424 to $428.50. However, the author dislikes this strategy due to lagging signals and frequent false moves, especially in day trading, as shown in a Bitcoin case study (January 26 to March 29, 2018) where choppy markets led to losses.

The document also notes SMA limitations, like delayed exits causing missed profits and the emotional challenge of holding winners, and compares SMAs to EMAs, noting SMAs are smoother but slower, while EMAs hug price action closer but may lead to premature exits in volatile markets.