Stop Loss and Moving Average trading strategy as examples of trading system

Let’s adduce a simple example of one the Forex trading system based on the most popular indicators such as Moving Average (MA). This popular indicator will help us to work our Stop Loss trading strategy.

We are building two Moving Averages with different periods: 21 and 70 (depends on the time frame chosen). Then we choose a type of exponential moving average - EMA (on time frames starting from daily frame: D1, W1, MN) or SMA (on intraday charts: M1, M5, M15, M30, H1, H4).

If price breaks through one of the Moving Averages, our trading strategy is to wait till the current candle is closed. If prices does not reach the second EMA (of the longer period - 70), then we will enter the market when MAs cross each other (or a bit earlier) (21).

In this case we place Stop Loss a little below the recently formed bottom or peak.

Like many other systems, this trading startegy has its own disadvantages. And one of them is false signals given when trend is over. But this system has one important plus – you will always follow trend,whereas the most part of beginners try to trade against it.

Cross of two MAs will be the signal that trend has changed. If the MA with 21-period crosses the MA with 70-period from top to bottom, it means that trend has changed and it’s a good time for selling. And if it is vice versa, you can buy.

But whatever system you use, remember the following:

  • if system works for one currency pair, it doesn’t mean it will be applicable for another one;
  • every system especially the given one should be tested for at least three years before you use it. If it is tested successfully, start to apply it;
  • you will often correct rules of system based on the market situation.

There are many websites, where you can download Forex trading systems for free. Keep in mind that these are only extra tools, which help to automate certain trade processes, but they will never substitute trader’s understanding of the market situation.

Build your own trading chart using Moving Average indicator.

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