"Algorithmic Trading with Moving Averages on Steem"

Moving Averages as used in algorithmic trading are used to gauge trends of assets prices. The other most common types of moving averages that are in circulation include the Simple Moving Average (SMA), Exponential Moving Average (EMA), and Weighted Moving Average (WMA). Each of these has different ways of assessing as well as weighting the past prices, and it’s their shortcomings as well as strengths in day trading strategies that this paper will focus.

With the Simple Moving Average (SMA) a predetermined number of previous price points is averaged but all periods are assigned the same weights. Its calculation is easy and smoothens the price for a long period of time, which helps in detecting trends over the long run.
The Simple Moving average also happens to be very suitable for both beginners and experts as it Is very easy to understand

However, there are certain disadvantages of using SMA. The major disadvantage of using SMA is that it is too slow to catch up with the recent changes in the market price. This speed in action is a plus in active markets. However, SMA can actually be found running far behind the real action. This makes SMA is less appropriate to day trading strategies, where time is of the essence.

Traders who make use of SMA often miss their chances to react early to market movement due to the lagging property of the SMA indicator and this is particularly inappropriate in market with a high volatility.

Using the death cross from the above screenshot as an example, looking carefully at the above chart, we would notice that the SMA reacted late to the change of market structure.
The market has formed series of bearish candles before we could get the death cross and this made me enter the market a little bit late, this is one of the set back of SMA.

Adding more functionality to each of these tools, the Exponential Moving Average (EMA) warrants mention as well. Exponential Moving Average (EMA) applies to the rates but incorporates the assumption of decreasing sensitivity to older rates. This allows the traders to make short positions smoother and quicker when the prices changes. This capability of a faster turnaround assists traders in arriving at new developments earlier than MA and this is better placed in fast growing algorithmic trading.

From the above screenshot, we can see that the EMA gave both buy and sell signal quickly and on can take advantage of this.
When the EMA is seen below the price chart, the market can be understood to begin a bullish move and when the EMA is above the price chart, we can expect to see a bearish move of the market.

The movement of the price curve has its advantages, and some disadvantages as well: more sensitivity is a benefit in capturing price areas, however, it results in the misdirection several times in an active volatile market.

A weighted Moving Average (WMA) computes the moving averages of a chosen number of days of the available price but places a given emphasis on the more recent data. Similarly to EMA, WMA is also quicker at adjusting to price changes, however its weighting system can be described as more sophisticated as traders can determine the significance of certain past data. Because of this, it can be employed in the more advanced trade strategies. Still, its limitation for a number of traders can be the pricy computation and like for EMA, it can prone to the market noise and spurious signals can arise.

In algorithmic trading strategies, rather than simple moving average, EMA is usually more popular as it provides both smoothness and responsiveness. It has, it should be stressed, all the advantages that are needed most of the time so that the wrong decisions can be avoided. Because EMA is more responsive, it is suitable for more aggressive strategies where the reacting to price change matters, especially in short-term ones. However, the choice between moving averages comes down to the purpose of the trading strategy, with all types having their pros and cons.

All three moving averages are very important in trading and when handled by a skilled trader will produce efficient results.

However, I would prefer to make use of SMA as it is easily understood, and most commonly used both by new and experienced traders.
I have carried out my backtest on all 3 moving averages and the SMA gave me a more effective result, a more win ratio also I encountered some few losses due market manipulation.

The SMA helps me to easily detect the trend of the market, when the SMA falls below the price chart, I understand it to mean a bullish phase of the market, as the SMA thus acts as support level to the market price as it keeps forming higher highs and higher lows.

And when the SMA goes above the SMA, I understand it to be a bearish market where the SMA inturn acts as a resistance level to the price chart

The above screenshot shows me making use of a large scale SMA to catch good trades on the pair STEEMUSDT, I can either make use of a single SMA or I make use of SMA crossover to spot death cross and golden cross.

One thing I have learnt about trading is that the simpler we keep it, the more effective and profitable it is, and since we do not control the market, it is very important that we implement a strict risk management policy.

And when implementing a risk management policy, it is very important to take into account of account size, and as the saying goes, a good trader is not one who is skilled at technical analysis, rather he is who is good at risk management.

• MY ENTRY AND EXIT:

Since it will be an automated trading, I intend to enter the market only based on golden cross and death cross.
This implies that I will enter a buy on the market went the short range SMA indicator crosses above the long range SMA indicator and I will enter a sell on the market when the short range SMA crosses below the long range SMA.

And I will do so because when the short range SMA crosses above the long range SMA, it signals a golden cross and this is a bullish signal, and when the short range crosses below the long range it shows a death cross and this signals a bearish Market.

• RISK MANAGEMENT

Like I said, a good trader is not known by his ability to predict the market, rather he is known by his ability to manage risks in the best way possible.

And to effectively manage my risk, I will only risk 25% of my trading capital in a trade, that is, if I am trading a $1000 account, each of my trade will cost me $250 if it goes again me.

And also, I trade with a risk to reward ratio of 1:3, that is, if I am risking $250 I will expect to make a profit of $750 when the trade hits my take profit level.

And also in line with my risk management, I will ensure to take partials when trading , taking of partial is a very effective way to minimize loss and risk in the market.

And to backtest my strategy, I can go far back as 6months to 2years to check how the market has reacted to this strategy and how profitable it has been.
And as far as I can remember, backtesting the crossover of moving average has a winning rate of 85% which is a very good win rate for a trader to be profitable.