Simple futures strategies for exploiting crossovers in moving averages are as old as technical analysis itself, and they continue to provide one of the easiest ways to keep on the right side of the trend. In this set-up we wait for price to buck the trend following a crossover, and then fade this movement, trading back into the dominant trend described by two moving averages.
This method is ideal for trading futures over a period of several days or longer, and it has fixed parameters, so once your order has been filled the trade should take care of itself. Although this is a simple set-up to trade, it is crucial that you use it on the right markets. You’re looking for commodities with a specific set of attributes; the contract should trade at moderate to high volume, it should chart cleanly and be capable of producing obvious trends, and it should be relatively stable. In other words, if it’s gapping all over the place on light volume with huge erratic up and down days that appear out of nowhere, then forget it.
Because this setup is designed to exploit trends in price, when the market enters a ranging period and the averages chop back and forth, its efficiency will be greatly reduced. To avoid these trend-less markets we can look to the Average Directional Index (ADX) to confirm that a significant breakout is indeed underway. This indicator, which measures the strength of a trending action, comes as standard in all good futures charting packages.
A second indicator that we can use as a filter is the William’s Percentage R (%R). This shows the relationship of today’s close relative to that of the prior ten days. In an uptrend, when the %R is below +20, then this represents a buying opportunity, and in a downtrend a reading above +80 represents a selling opportunity.
Parameters for buy orders (for sells rules are reversed)
When trading this strategy, be sure to check your margin requirements with your broker to make certain that you have sufficient funds in your brokerage account to cover losing trades based on the number of contracts you plan to trade.
This method is ideal for trading futures over a period of several days or longer, and it has fixed parameters, so once your order has been filled the trade should take care of itself. Although this is a simple set-up to trade, it is crucial that you use it on the right markets. You’re looking for commodities with a specific set of attributes; the contract should trade at moderate to high volume, it should chart cleanly and be capable of producing obvious trends, and it should be relatively stable. In other words, if it’s gapping all over the place on light volume with huge erratic up and down days that appear out of nowhere, then forget it.
Because this setup is designed to exploit trends in price, when the market enters a ranging period and the averages chop back and forth, its efficiency will be greatly reduced. To avoid these trend-less markets we can look to the Average Directional Index (ADX) to confirm that a significant breakout is indeed underway. This indicator, which measures the strength of a trending action, comes as standard in all good futures charting packages.
A second indicator that we can use as a filter is the William’s Percentage R (%R). This shows the relationship of today’s close relative to that of the prior ten days. In an uptrend, when the %R is below +20, then this represents a buying opportunity, and in a downtrend a reading above +80 represents a selling opportunity.
Parameters for buy orders (for sells rules are reversed)
- Set up a daily bar chart displaying exponential moving averages of the following time periods: 8, 21, 200. Use different colours for each to help keep things clear.
- Only take buy signals when the two shorter period moving averages are trending above the 200EMA, as this will keep you on the right side of the long-term trend. The best signals come with this setup following a sideways ranging period.
- Only take buy signals when the uptrend has been strong enough to generate a +30 reading on the ADX, and then the pullback has been sufficient to generate a reading of less than +20 on the %R. It is normal to see the ADX decline slightly from its +30 high as the pullback is made.
- Wait for the 8EMA to cross above the 21EMA, and for the price to trend a little way above these averages.
- A buy signal occurs when the price pulls back and touches the 8EMA – this will normally occur in a retracement after the market has trended for a while. The easiest way to manage an entry is to place a Buy (Limit) order to open at the 8EMA with your broker, and then adjust the level of this order at each day’s close. You may have to step this order up a fair few times before a pullback occurs and it is filled.
- Profit targets and stop-losses are mechanically defined for this trade. Your profit target is equivalent to an 8% increase in the market’s value, and can be calculated by multiplying the entry level by 0.08 (eg if Crude Oil was trading at 420 points when you entered long, your profit target will be 420 x 0.08 = 33.6, so your sell order should be placed at 453.6 points (420 + 33.6)). Your stop loss should be either half this amount (ie equivalent to a 4% decline), or the 21EMA, whichever is greater (typically they’ll be very similar).
- A further filter that can be applied to this trade is to take only the first pullback to the 8EMA, and ignore subsequent signals until the trend has reversed.
When trading this strategy, be sure to check your margin requirements with your broker to make certain that you have sufficient funds in your brokerage account to cover losing trades based on the number of contracts you plan to trade.