Reader Nitin Writes that he has followed my advice and taken up a job. He has an educational loan to replay, so he wishes to know if he can trade on the side with an automated trading strategy. Should he start with moving averages?
My Notes: Nitin, your comments have made my day. I am glad that you have taken a sensible decision. You should stay in touch with trading. Automatic trading systems is an easy way to remain in the field, and, hopefully, make money.
My suggestions are:
1. Use End of Day data as the basis of your trading decisions. This way, you will be free to concentrate on your job during the day. In the evening, you can update your data, check up your systems and plan your trades (If any) for the next day.
2. Trading with automated systems is a good idea, since it keeps you disciplined while making your decision making process easier.
3. There are three basic methods for trading - Volatility, Trend and Support-Resistance. A moving average system tracks the trend. It will make money in trending markets while losing in range bound markets. Support-Resistance systems buy on dips and sell on rallies. They get killed in trending markets. So, you have to decide for yourself - what kind of trading would you like? If you are comfortable with a few large profits and many small losses, then trend trading is for you. Experiment with exponentail, weighted and Zero lag averages. Use the dirction of the average as your signal. When the average is moving up - buy. When moving down - Sell. Keep a fairly large lookback, like 34 or 40 or even 55. This will enable you to catch most trends.
4. Have the 'Campaign Trading' approach. Trade in two units. The first unit should follow the moving average signal. The second unit should be used for quick trades in the direction of the trend. For example, in an uptrend, if prices pullback for three days, then buy the second unit, expecting a rally. Exit this unit in 3 or 5 days. This way, you can find opportunities to add value to your MA system.
One you start, then a lot of ideas to fine tune the system, will come to you.