A two moving average crossover trading system is perhaps one of the most simplest and easiest of trading systems that one might come across. The logic behind this trading strategy is to employ two moving averages where one tracks the longer term period, while the other tracks the shorter term period. Because the moving averages depict the average prices over their period, mathematically, when a short term moving average is above the long term moving average, it usually depicts a bullish trend and then the short term moving average falls below the long term moving average, it depicts that prices will continue to fall.
What can be more simpler than that? But despite its simplicity, the moving average crossover system is often underrated and written off by many. Most traders prefer to choose the complex trading systems believing that the more indicators there are, the more the chances of winning.
This Renko based moving average crossover system shows you how simplicity can trump complexity.
Renko based moving average strategy
We make use of two moving averages, 50 and 20 period EMA. But feel free to use any combination, although I would advise to keep the short term moving average 10 periods or higher.
Once the moving averages are set up on the chart, it would show up like this. Simple!
Renko Moving Average Trading system – Chart Setup
As for the Pip size, it is up to you. But I advise to use at least 15 pips or higher if you are trading the major currency pairs.
Renko based moving average crossover – Rules
Before we head into the rules, there is a simple yet important aspect to mention. We do not buy or sell when there is a bullish or a bearish moving average crossover.
Instead, we wait for the retracement near to the price level where the moving average crossover happened. Once prices retraces back to the crossover level, and if the moving averages are still lined up in our preferred direction we then go long or short.
Buy Rules:
20 EMA has made a bullish crossover 50 EMA
Price is trading above the 20 and 50 EMA
Look for support/resistance near the moving average crossover
Buy when price dips to this level (and 20 EMA is still above 50 EMA)
Place stops at the closest swing low
Target the previous peak, exit partially and continue to trail your stops
Sell Rules:
20 EMA has made a bearish crossover 50 EMA
Price is trading below the 20 and 50 EMA
Look for support/resistance near the moving average crossover
Sell when price retraces or rallies to this level (and 20 EMA is still below 50 EMA)
Place stops at the nearest swing high
Target the previous low and continue to trail your stops
Moving Average crossover system for Renko – Examples
The first chart below shows the buy set up. Read below to see how the buy set up was formed on this chart.
Renko Moving Average – Buy Example
The 20 EMA crossed above the 50 EMA and then rallied to 0.7230 and started to retrace
We then look at the region where the bullish moving average crossover happened
A support level was identified which was also tested briefly just near the moving average crossover price level (0.7020 – 0.6990)
When price falls to this support level after the initial peak at 0.7230, the 20 EMA is still above the 50 EMA
A long position is taken at 0.7020
Stops are placed near the recent swing low, which is at 0.693
For the first target, the previous high at 0.7230 is used, for the second target, stops are trailed, to either along the 50 period EMA or booked at a 1:3 or 1:4 risk/reward level
The next chart below illustrates a sell set up, which also shows an example of a trade getting stopped out on the target 2.
Renko Moving Average – Sell Example
20 EMA makes a bearish crossover below 50 EMA and falls to 0.7080. We now plot the resistance level near the bearish crossover
Looking to the left, the resistance level is plotted near 0.7230 – 0.7200. A sell position will be taken if price retraces to this level and the 20 EMA remains below the 50 EMA
Stops are placed at the nearest swing high level, which is at 0.7290. Target 1 is the recent low that price made, at 0.7080, while the second position is trailed to the 50 EMA
The second target is then stopped out when price rallies back
Renko Moving Average Crossover strategy – Ranging markets
You might be wondering how to trade when prices remain sideways. Let’s take a look at a few examples on how this system performs. Read below to see how this system performs when markets are ranging at the very least, how you could manage your trade you find that the markets are moving sideways.
Renko Moving average system – Sideways market
20 EMA makes a bearish crossover below 50 EMA, so we start to look at the resistance level, which is plotted near 0.7200 – 0.71700
Price makes a low at 0.7020 and then begins to retrace. The short set up is now triggered with the pending sell order at 0.7170 with stops at 0.7290, the nearest swing high
However, price continues to rally higher. Note that after a rally to the upside, the 20 EMA makes a bullish crossover above 50 EMA and then prices fall back right to the entry at 0.7170. This is a trigger to exit. Of course, if you are not in front of your screen and came back a few boxes later you can still close out your trade for a smaller loss than getting stopped out at 0.7290.
An important point to bear in mind is that when a set up fails, you don’t trade anymore, but wait for a new signal to show up. (Meaning, in the above example after we exit because price moves against us, we do not take a long position, but instead wait for a short position)
In the next example, we have a similar failed short set up, but again in this example, while our initial stops were set to 0.7260, price dipped after rising above the pending sell at 0.71400 and fell to 0.7170, which by then the 20 EMA was crossing above 50 EMA. So we exit the short position here for a loss of 30 or 45 pips instead of the original stops which was 120 pips above the entry.
Renko moving average crossover – Dealing with failed set up
The trading strategy as illustrated is very simple and easy to use. It is nearly mechanical trading system, but requires some subjectivity in terms of plotting the support/resistance levels. The trading system is so simple that even during failed set ups or sideways markets, you will still be able to exit with a small loss.
