In the same way as happens with other similar trading strategies based on moving averages, in markets with low volatility and without a defined trend, the Skydive System often produce false signals. For that reason we can include a filter based in indicators like the MACD or the Williams %R.
This strategy can be used in intraday trading, medium term trading and long term trading as it can take advantage of the different trends in the market.
- A candlestick/bar chart in the time frame in which the investor trades normally.
- An EMA (Exponential Moving Average) of 4 periods.
- An EMA of 18 periods.
- An EMA of 40 periods.
- We can use indicators such as the MACD and other as a filter to avoid opening positions based on false trading signals.
Trading System Rules
- Wait until the three moving average cross each other in one direction or another. Once the crossover of moving average is produced, the trader should open a position in the market in the same direction of the trend. That is, a long position for a bull market and a short position for a bear market.
- The ideal crossover is when the three moving averages cross at one point (or nearly at the same point) at the same time. It is a very strong signal, especially in bear markets. However, the other crosses can be used as trading signals if they occur in the same direction. In these cases, the trader should be careful about when and where to open a position after the moving averages crosses each other. This could be a bit subjective.
- Once the moving averages crossover occurs in one direction, an important recommendation is to wait until the second or third candle to open a position in order to confirm the trend change. This is because in the moving average crosses not always occurs a trend change, so the trader must be careful with the false signals.
- Stop loss: The stop loss can be placed below (above) the low (high) of the previous candle when we open a long (short) position after the cross of moving averages. Also, the trader can stablish a stop loss depending of the time frame in which he is conducting his trades in the market
- Take Profit: The trader can close the position and take profits when the price crosses the EMA of 40 periods in the opposite direction of the trade. In this case, this is the exit point. Also, the trader can close the position near an important support or resistance to protect the earnings.
Additional Notes On The Trading System
- This is not a mechanized system, therefore the trader is exposed to risks and mistakes if he is not very familiar with it.
- The entries are easier than the exits, so the trader must establish a take profit and a stop loss to protect the earnings and reduce the risk.
- If the EMA 18 and the EMA 40 are parallel, this is a sign of an stable trend, so the trader should continue in the market.
- Is important to practice this trading strategy in a demo account, because the entry points after the crosses can be subjetive so the trader must learn when to enter the market more effectively
- As we mention at the beginning, this trading system is a trend follower, therefore it is more useful in markets with a high volatility and defined trends. For that reason, we can use indicators such as the MACD and the Williams %R for example, as a filter of the trading signals. Remember that in a trading range, this trading strategy is ineffective. Therefore, this filter can help us avoid false trading signals.