3 Candle, 5-Day SMA Strategy for SPY & QQQ
This strategy works in both directions and will help you stay in your trades longer.
You know the feeling when you just closed your trade with decent profits only to see the move continue without you in it.
The emotion goes from one of happiness for your win to one of regret, wishing you were still in the trade.
And then of course someone has to start talking about how they are still in the very same trade and are enjoying the extended move and huge profits.
Staying in trades longer to maximize gains is a powerful way to grow your account.
Overstaying your trades will have the oppposite effect, which is why many traders tend to close out positions too early.
I am definitely guilty of this.
So, what can we do to stay in winning trades longer?
I like using a combination of the 5-day simple moving average (SMA) and a three-candle pattern.
That is all there is to it. The 5-day SMA and three candles.
This strategy will show you when to enter as well as when to exit trades.
It is not perfect, but I find it very effective.
Take a look at this chart for SPY.
Starting at the left, when the 5-day SMA is in a downtrend I am looking to take a short position after the third candles closes below this moving average.
Next, you simply stay in the trade until you see the candles make a clear move above the moving average, causing the 5-day SMA to curl upward.
That is your exit from the short position.
There are two additional short trades pictured, the first would have had you buying puts two days before the gap down and continuation lower.
The second was shorter lived as markets turned around.
Notice that after entering the long trade, on the third candle above the 5-day SMA, the chart gets close to breaking below the moving average but never do.
Instead, they quickly recover and the SMA never curls downward allowing you to stay in the trade.
Finally, nearly 40 points higher you would have seen a signal to close your position as three candles dropped below the 5-day SMA and it rolled over.
Unfortunately, if you took a short position here you would have lost a little money as shares quickly reversed for more upside.
That said, your stop loss would minimize the losses and you would have already been up in a big way.
Another long entry could have been made on January 22nd, and we have not yet had reason to sell out of this long position.
You can use this strategy on any ticker. Take a look at QQQ.
There are three short trade entries and two long trade opportunities, with the long trade holding above the 5-day SMA for extended periods.
When you see this kind of respect for a moving average, you can add to your position on the dips and stay in the trade longer.
The weekend is a great time to review strategies like this and any other that interests you.
Take a look at a few of your favorite tickers to trade and check on how it reacts against the 5-day SMA.
You can do this on different time frames as well and with different SMAs.
I have found this combination to work well for me, but you might identify a different moving average that works better on a different time frame for a different ticker.
As long as it is consistent and works, go for it!
But also be willing to let go of a strategy when it stops working. This does happen and it often takes a little time before traders identify what is going on.
I hope you enjoy the extra time with markets closed on Monday.
Review your watchlists, deep dive a few charts, and be sure to read more of this newsletter as I’ll be dropping new trade ideas on top of the livestream on Sunday.
Let me know if you have any questions. I enjoy hearing your thoughts on these strategies!
Until then.
-Nate
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This service is for general informational and educational purposes only and is not intended to constitute legal, tax, accounting or investment advice. These are my opinions and observations only. I am not a financial advisor.
Thank you for this. I love your strategy articles, Very valuable information. Gonna back test this today while at work today