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The traffic light is considered one of the simplest trading strategies based on the Moving Average indicator. Trading using this strategy should be made only when a strong trend is determined, otherwise there may not be a profit from the trade.
The strategy consists of five moving averages located directly on the price chart , and their intersection and arrangement in a certain order will be considered a signal to open positions. Trading using this strategy can be made exclusively on the hourly chart with the GPB/USD and GPB/JPY currency pairs.
Strategy indicators
The traffic light strategy is based on the functioning of five moving averages with different parameters. The main moving averages will be SMA(120), SMA(55) and EMA(5). It is their location and intersection that will affect the current trend, thereby determining the type of position opening. In this case, the remaining moving EMA(24) will indicate the points of trend strength, that is, put forward the optimal positions for entering trades.
- -SMA(120) - slow simple moving average with the longest period -120, the calculation of which will be applied to the Close price.
- -SMA(55) - medium simple moving average, the period of which is 55, and the calculation method is the Close price.
- -EMA(5) - fast exponential moving average with a period of 5. It will be calculated at the Close price.
- -EMA(24) - exponential moving average with a set period of 24, which is calculated at the High price.
- -EMA(24) - exponential moving average with a period of 24. Calculations will be based on the Low price.
For own convenience, the colors of the moving ones should be made different.
Making trades using the strategy
Opening any trades using the Traffic Light strategy is very simple, the main thing is to be extremely careful. The basic rule of trading is the intersection and location of the moving averages. As soon as all the moving averages are lined up in a certain order, and the signal candle has already closed, a position can be opened in the required direction .
Conditions for Buy trades:
- -Moving averages are located in the order: EMA(5)-top, then SMA(55), and already below-SMA(120), and there is a clear intersection of these lines.
- - The price is above the channel consisting of moving EMAs (24).
A long position is opened on the next candle with a stop loss of 40 points. A buy trade should not be opened if one of the trade conditions does not match. For example, if the price for an uptrend period is in the moving EMA channel (24). When changing market movement, the trade should be closed.
Conditions for Sell trades:
- -In the market, by crossing and arranging the moving averages in the order: SMA(120), SMA(55) and EMA(5), a downtrend has been determined.
- -The price is below two moving EMA(24).
With a combination of the above conditions, a short position is opened on the next candle. Stop loss is set at 40 points. A sell trade cannot be made if at least one condition is absent. A sell trade cannot be made if at least one condition is missing. For example, a trade is not opened if the candle is located between the EMA(24) lines during the entire downtrend. The trade should be closed if the market has changed the trend.
Conclusion
The Traffic Light trading strategy for the hourly chart of the GBP/USD and GBP/JPY pairs is very easy to use and, if applied correctly, shows excellent results. However, the presence of false signals is not excluded, therefore, when using the strategy, it is worth observing all the conditions for making trades, as well as using a demo account in advance.
