Moving Average Strategy - Part 1

Royal Algo Moving Average Strategy

In this section, we will show you how we filter false signals, where to place stop loss and some market examples. Including support and resistance levels, as well as entry and exit targets.

We will be using the Ichimoku Cloud moving average along with Royal Algo to provide a further understanding of the overall market movements. Though, in the next section we will apply the entire Ichimoku Cloud system.

Ichimoku Cloud or Ichimoku Kinko Hyo?

Ichimoku Cloud is developed by Goichi Hosoda. It represents a trend-following trading system with a variety of indicators that are similar to moving averages. The Ichimoku cloud is one of the few indicators out there that can predict price movement. The advantage of this indicator is that it offers a unique perspective of support and resistance by representing these levels based on price action.

How to Properly Set up your chart with Ichimoku Cloud Moving Average

Simply click the Indicator and Strategies and then search for Ichimoku Cloud. Make sure to use the built-in version of the Ichimoku Cloud.

For mobile, click the plus button and then indicators. Search for Ichimoku Cloud. Make sure to use the built-in version of the Ichimoku Cloud.

Once you have added the Ichimoku Cloud to your chart. Click the settings. For the Inputs, leave it as default. Under style, uncheck everything except the Conversion Line and Baseline. This is what we will be using for this strategy. A similar process for mobile.

You can edit the thickness and colour of the moving averages to your preference.

Recommendation - Do this!

We recommend that you go through this strategy section with Royal Algo and the Ichimoku Cloud Moving Average chart in front of you. So you can follow along and get familiarized with this strategy on your chart.

Moving Average

On this strategy, we will be using two Ichimoku Cloud moving averages. One is the Tenkan-sen, but we will be calling this the Conversion line. Two is the Kijun-sen or also known as the Baseline.

Tenkan-sen/Conversion line - Plotted as the highest high + lowest low/2, averaged over the last nine periods.

The Conversion Line is also known as the turning line. Conversion Line signals an area of minor support or resistance. It also moves much faster than the baseline and reacts to trend changes much quicker. Its slope shows the market trends, and when it moves sideways, it indicates a ranging market.

Formula: (9 period high + 9 period low)/2

Kijun-sen/Baseline - Plotted as the highest high + lowest low/2, averaged over the last 26 periods.

The Baseline moves much slower than the conversion line. The Baseline is also known as the confirmation level and serves as a signal for support and resistance. A lot of traders use the Baseline as a trailing stop level. This is what we will use as a stop loss.

Formula: (26 period high + 26 period low)/2

How to Read Ichimoku Moving Average Indicators

For many traders, the Ichimoku cloud system might seem complicated and hard to understand, but once you get familiar with how to interpret the charts you will find a lot of great trading signals.

Since the Conversion line only measures 9 candles, it is considered a short-term price movement. If the market price is above the Conversion Line, this suggests a short-term upward momentum. If the market price is below the Conversion Line, this suggests a short-term downward momentum.

The Baseline represents medium-term price movement since it measures more candles than the Conversion line. If the market price is above the Baseline, this suggests a medium-term upward momentum. If the market price is below the Baseline, this suggests a medium-term downward momentum.

For the strong price movement, we will look at the entire Ichimoku Cloud System on the next section.

How to Identify Ichimoku Moving Average Trading Signals

One of the most popular strategies among Ichimoku Cloud users is the Crossover Trading Strategy. The crossover between the Conversion line and Baseline can offer trading opportunities similar to the moving averages. You’re probably asking, why not use normal SMA or EMA? That is because the Ichimoku Cloud moving average offers support and resistance, as well as stop-loss levels, unlike the normal moving averages.

When the fast-moving Conversion line crosses above the slower moving Baseline, we have a Buy signal. (When the Blue line crosses above the Red line, we have a buy signal).

When the fast-moving Conversion line crosses below the slower moving Baseline, we have a Sell signal. (When the Blue line crosses below the Red line, we have a sell signal).

When the Moving Average is relatively close and clasping each other it is considered a Ranging market.

TIP: Imagine there is an arrow at the end of the Conversion line/Blue line. It will help you find better entry and exit targets. If it’s pointing up, it indicates a bullish trend. If it’s pointing down, it indicates a bearish trend. If it’s pointing sideways, it indicates a ranging market.

Check the examples below to give you a better understanding.

Ranging Market

Upward/Bullish Momentum

Downward/Bearish Momentum

Strong and Weak Upward/Downward Price Movement

Strong Bullish Momentum - When the price is trending above the Conversion Line and above the Baseline, meaning that the moving average cross over already happened. It is considered a strong bullish momentum.

Valid Trades

Weak Bullish Momentum - When the price is trending above the Conversion Line but still below the Baseline. It is considered a weak bullish momentum.

Invalid Trades

Strong Bearish Momentum - When the price is trending below the Conversion Line and below the Baseline, meaning that the moving average crossover already occurs. It is considered a strong bearish momentum.

Valid Trades

Weak Bearish Momentum - When the price is trending below the Conversion Line but still above the Baseline. It is considered a weak bearish momentum.

Invalid Trades

Using Moving Average to Filter Signals

Now, we will be using Royal Algo along with Ichimoku Cloud moving average to filter false signals.

Most of these false signals are market pullbacks and corrections.

Scroll down to see the example below.

Filtering Signals on Bullish Trend

Filtering the signals on a bullish trend - When the price/candlestick is trending above the Moving Average. We will only take the Buy signals given by Royal Algo and we will consider all Sell signals as false signals.

Filtering Signals on Bearish Trend

Filtering the signals on a bearish trend - When the price/candlestick is trending below the Moving Average. We will only take the Sell signals given by Royal Algo and we will consider all the Buy signals as false signals.

Where To Place Your Stop Loss

When entering a trade, you should understand and know your risk first before worrying about your potential reward. There is no strategy in the world that can offer a 100% winning ratio. That’s why we have to place a stop loss so we can minimize our losses when the market decides to go the other way. there are multiple ways where we can place a stop-loss on this strategy.

First, where the Baseline forms a horizontal line(low risk)
Second, count 10-20 Pips below or above the buy/sell signal(medium-high risk) Of course this depends on what timeframe you’re trading on.

We recommend using the Baseline for stop loss. Red dotted line shows the stop loss level. This strategy is low risk. However, since the stop loss level is quite close to the entry. You may get stopped out too early, we suggest moving your stop loss according to your risk tolerance.

When Should You Enter a Trade?

Whether going for a long or short position. Royal Algo can give you a signal when it's time to BUY or SELL. We should consider not taking any position when the market is ranging. Another way to tell when the market is ranging is when the moving averages are pointing sideways. When you get a signal above or below the moving average while pointing upwards or downwards you may open a position.

When Should You Consider Closing a Position?

We cannot always close the trade at the very top or at the very bottom. Therefore, we have to find rational reasoning upon closing a position. There are several ways to close a trade on this strategy.

First, when it seems like the Moving Averages are starting to point sideways and clasping each other indicating that the market is consolidating and can possibly go both ways.

Second, when the opposing signal shows up. This depends on the current condition.

Finally, when the opposite Moving Average crossover takes place. Meaning that the market is about to head in the opposite direction.

Trailing Stop for Winning Trades

A trailing stop is designed to keep your profits or limit losses as your trade moves in your favour. If you feel comfortable locking your profits at a certain pips/price or you’re looking to ride the trend without a risk. You can move your stop loss at your entry price or small profits for a risk free trade.

Market Example

On this chart, we can see a strong upward momentum. Any short/sell signal on this picture will be considered as a false signal. The first Buy signal is right after when the Moving Average crossover happens. However, we are stopped by the short signal for a retest.

The second Buy signal indicates a strong upward movement. Since the price is above the Conversion Line and the Baseline. At the same time, the Moving Average crossover already took place. Like we mentioned above, Moving Average crossover signals an entry point for Ichimoku Cloud strategy. So, as soon as the crossover happens and you get a buy signal above the Moving Average you may take the trade depending on the condition.

On these trades, we can see that the Conversion line is acting as a support as it consistently hold the price. In this case, you can ride the trend and start trailing your stop-loss at the Baseline or simply move your stop-loss at your entry price for a risk free trade.

Red dotted line shows the stop loss level. This strategy is low risk. However, since the stop loss level is quite close to the entry. You may get stopped out too early, we suggest moving your stop loss according to your risk tolerance. But in most cases, if it's a good trend the stop loss at the baseline is reasonable.

Key Take-Aways

Royal Algo indicator alone is an effective tool. It can help you find buy and sell opportunities in any market. Adding additional indicators will significantly increase your chance of success.

Also, when you add price action and key levels on higher timeframes. This strategy will become much more reliable.

Upward Momentum:

When the price is trending above the Conversion Line but still below the Baseline, and Royal Algo signals an upward arrow. It is considered a weak buy signal. Therefore you should only consider opening a portion of your normal lot size/position.
When the price is trending above the Conversion Line and above the Baseline, meaning that the moving average cross over already occurs and Royal Algo signals an upward arrow. It is considered a strong buy signal.

Downward Momentum

When the price is trending below the Conversion Line but still above the Baseline, and Royal Algo signals a downward arrow. It is considered a weak sell signal. Therefore you should only consider opening a portion of your normal lot size/position.
When the price is trending below the Conversion Line and below the Baseline, meaning that the moving average cross over already occurs and Royal Algo signals a downward arrow. It is considered a strong sell signal.

Ranging Market

Be extra careful when trading the ranging market, because the market can possibly breakout in either direction.
When the Moving Average is relatively close and clasping each other it is considered a ranging market.

CONGRATULATIONS!

We really hope that this strategy can guide you in the right direction. In the next section, we will explain how to use the entire Ichimoku Cloud system with Royal Algo.

The strategy that we provide is just a guide. The past performance doesn’t guarantee the future results.

If you need any assistance or have any questions, please reach out to us via email on our website under the contact us section or the email down below. Royal Algo offers 24/7 support. But due to high traffic, it may take a few hours for our support team to respond. We will do our best to get back to you in a timely manner.

royaltradingalgo@gmail.com