The Simple Moving Average (SMA) is a great indicator tool for trading. In this post, I will share with you how I use the SMA indicator in conjunction with my own trading strategy to determine how to trade and create an edge over the long term.
Adding SMA Indicator on Tradingview
To add the simple moving average indicator, you want to click on the icon on the top corner that says “Indicators, Metrics and Strategies”.
Next, you want to type “moving average” on the search bar.
Select the moving average and it will add it on your chart.
On the top left corner, you will see the 9 sma by default. To change it. You want to click on the settings(the 3 dots icon) and a pop up will appear where you can adjust colors, sma number and other extra settings.
The first length option is the number you want to change. This determines the average days the line will be using. The most common settings people use are:
- 7 – For short term swing trades, this is a good one to use.
- 20/21 – I like this for gauging shorter term trends on the daily chart.
- 50/55 – Good for longer term swing trades
- 100 – Used by long term technical traders
- 200 – I use this to determine whether we are in a bull or bear market. When below, it is a bear market for me and I don’t do long trades when it is below this moving average.
The second length options under smooth doesn’t make much of a difference, so I don’t tweak it. If you head over to the style tab, you can change the colors to your liking. Here is how I setup mine:
I personally like to use the 20, 50, 100 and 200 SMA for my charts. I rarely use the 5 or 7 SMA because those are more well suited for very short term trades. Most of my plays are made from a swing trading perspective.
Since I sell options, it makes sense for me to use the longer term SMA to determine the strike prices I will be selling.
How To Use Simple Moving Average Indicator As a Trading Edge
I have been using the SMA to execute my covered calls and cash-secured put (CCP) options strategy. Here are some rules that I set for myself when it comes to this:
- When the stock is trending up above the 200 and 100 SMA, then selling 0.3-0.5 delta CSP is okay.
- When the stock is in an aggressive uptrend trading above the 50 day SMA, then selling 0.6 delta CSP or 0.1-0.3 delta covered call is viable.
- When the stock starts trading below 200 day SMA, then hedging is required. Any defensive strategies such as collar and deep in the money (0.6-0.9 delta) covered calls will be utilized.
These simple rules along with proper risk management has helped me reduce the cost basis of my stocks to 0 and I get to own them for free.
I sold enough covered calls, cash secured puts, defensive collars to get MARA to 100 free shares and more. This took about 1 year to do so.
HUT 8, another bitcoin mining stock, was also another stock I was able to reduce the cost basis to 55 cents after 7 months of trading it. My goal is to make it free within the next 3 months.
Example Trades of Using SMA to Determine Strike Prices
MARA Collar Trade
So on December 3rd 2021, MARA closed below the 50 day moving average. That was one of the few signs that the bull run was in danger of completely flipping. Having closed below it, I opened a defensive collar:
I started to sell the $41 strike covered call alongside buying a $43 strike put to delta hedge (1.1) my MARA equity from dropping further. This came at the cost of potential upside, but I was not about to give up more gains than I already did.
HUT CCP Trade
When HUT 8 was in an uptrend during the Bitcoin bull run, I sold many CCP alongside owning the stock and selling covered calls as well.
During October 21st 2021, HUT 8 broke out to continue an uptrend. On October 25th pullback, I started to sell the 11 and 13 strike CCP.
Buying calls would have worked here, however, I prefer the more defensive approach here with CCP.
Now, I also had to close out one of the CCP for a loss when HUT 8 broke its 50 day SMA on December 2nd 2021. I also bought a put in the process to hedge the downside.
As you can see, the SMA were able to help me plan my trades a lot better and protect my equity or prevent me from having too large losses should trades go against me.
That is the beauty of the simple moving averages. Hope this helped and stay safe trading!