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An Example — The Moving Average Crossover Strategy (Part 2 of 2)

Updated: May 9

Welcome


Hello and welcome to our sixth article. This issue explains trade management with reference to a basic trading strategy, the Moving Average Crossover strategy (for background detail, see the entry at babypips). All articles are saved at our Medium page.


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These articles are based on my experience from consulting and product development at The IQT. Do let us know if there are topics you would like us to cover, questions you would like to resolve, or if there are insights you would like to share from your own experience.


Last Time


In Article 5 — “An Example — The Moving Average Crossover Strategy (Part 1 of 2)”, we discussed the different trading process stages involved in the basic Moving Average Crossover Strategy, i.e. Analysis → Setup → Entry → Exit.


Overview


The most basic form of the Moving Average Crossover strategy does not feature a management stage, but including one makes it more sophisticated. Then the trading process looks like: i.e. Analysis → Setup → Entry → Management → Exit. We will review possible forms of trade management now;


1. Trailing Stops: Moving a stoploss as the trade becomes more profitable, to limit potential loss


2. Partial Closes: Partially closing the trade as the trade becomes more profitable, to limit potential loss


3. Scalping: Setting takeprofits (and stoplosses) close to the current price to take advantage of small price movements


Main Points


1. Trailing Stops

If a trade becomes profitable, we may wish to move any existing stoploss to reduce the maximum loss. E.g. consider the diagram below where a buy order is entered at the first blue arrow.

Trailing Stops for a Buy Order


When entering the order, we might define an initial stoploss at the red dashed line, which corresponds to the previous price low. As time progresses, price rises so we might move the stoploss to our initial entry price (“trailing to break-even”) at the blue dashed line, then the trade will not make any loss. If the trade becomes highly profitable, we might move the stoploss beyond the entry price to the green dashed line, to guarantee a positive amount of profit.


2. Partial Closes

If a trade becomes profitable, we may wish to realise some of the profit by partly closing the trade. E.g. if we have a buy order with a position size of 1 lot, we might close half of it by placing a sell order of 0.5 lots at the current price. Then our maximum loss is reduced, but we can still benefit from favourable price movements.


3. Scalping

Scalping involves extracting gains from small price movements (here is the Investopedia definition). It could be implemented in the MA Crossover strategy by setting a stoploss and takeprofit close to the original entry price, and setting the MA window lengths to be short, e.g. using 5 minutes for the short-term MA and 15 minutes for the long-term MA.


Further Reading


We will explore the main types of trading strategy in the next article, “Types of Single-Asset Strategy”.


Thanks and happy trading!

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