SMA Crossover Bullish Trend Following Strategy

Overview

This strategy is a long-term trend following strategy based on the crossover of Simple Moving Averages (SMA). It generates buy signals when the short period SMA crosses over the long period SMA and follows the uptrend. At the same time, it also sets take profit and stop loss based on certain percentages of the entry price to manage risks.

Strategy Logic

The strategy mainly uses the “golden cross” crossover signals of the SMA indicator to determine entry timing. Specifically, it calculates the 9-period and 21-period SMA respectively. When the short term 9-period SMA crosses over the longer term 21-period SMA from below, it indicates the price is shifting from consolidation to an uptrend, which is a good timing for trend following. The strategy will then generate a buy signal to follow the trend.

In addition, the strategy also dynamically sets the take profit and stop loss based on 1.5% and 1% of the entry price. That means the take profit will be 1.5% above the entry price and the stop loss will be 1% below. Through this approach, it manages risks by setting a predefined risk-reward ratio.

Advantages

• Using SMA to determine entry filters out short-term market noise and catches mid-long term trends.
• The SMA periods are adjustable and can be tuned to adapt to trends over different time horizons.
• The risk management mechanism is comprehensive and can control single trade loss by adjusting risk-reward ratio.
• The strategy is simple to understand, suitable for beginners in quantitative trading.

Risks and Solutions

• SMA crossover signals may have false breakouts, causing unnecessary losses. Other indicators can be used to filter the signals.
• The take profit and stop loss are relatively fixed, which may lead to expected profit but actual loss. Consider dynamically trailing take profit and stop loss.
• The risk-reward ratio is fixed and cannot adapt to changing market volatility. Consider using ATR and other indicators to dynamically adjust risk-reward levels.
• There is a certain time lag. Can consider reducing SMA periods or introducing leading indicators.

Enhancement Opportunities

• Add other indicators to filter SMA crossover signals and avoid false signals, e.g. KDJ, volatility indicators etc.
• Dynamically trail take profit and stop loss, e.g. using Chandelier Exit algorithms.
• Use ATR and other indicators to dynamically adjust risk-reward ratio based on market volatility.
• Reduce SMA periods or introduce leading indicators to lower time lags.

Conclusion

This is a medium-long term trend following strategy based on SMA crossover. It identifies trends with SMA and controls risks by setting take profit and stop loss. The advantage is it is simple and easy to implement, suitable for beginners in quantitative trading. Meanwhile, there are also rooms for enhancement, such as adding other signal filters, trailing take profit/stop loss dynamically, adjusting risk-reward ratios based on volatility etc. Through continuous improvements, the strategy can become more robust and adapt to more market environments.