SMA 50 Period Crossover Trading Plan

This is a post designed to help me prepare and codify rules for trading the SMA 50 period crossover. There are YouTube videos that discuss the Simple Moving Average (SMA) located here (*), here (*), here, here (*), herehere, herehere, here and here. Note that this strategy uses only the 50 period moving average for the trade.

ENTRY POINT: The entry is done when the stock moves above the 50 SMA.


FINANCIAL INSTRUMENT: Any type of financial instrument can be used – stocks, options, ETFs, etc. I will be using options. This is a long only strategy so I will be buying Calls around the Option Strike Price that is closest to an Option Delta of .70.

HEDGING MANAGEMENT: I will be using a Roll Down Strategy to keep the Option Delta around .70. I will also be using Puts to hedge my Call purchases. This will be covered in Rules.

MONEY MANAGEMENT: One Call will be purchased on entry. At the time of this writing only a Call on SPX that around .7 Delta and was approximately one week until expiration would violate a rule that states that no trade would be more than $1,000, i.e., one percent of a $100,000 portfolio. The purchase of one option contract of a typically priced stock would rarely be more than one percent of a reasonably good sized portfolio. Over 99.9% of stocks with weekly options and a price under $100 and have options with a .70 Delta and a seven day expiration are priced under $2.50 or $250 for a contract. This represents about one percent of a portfolio that meets the requirements of a day trader ($25,000). Additional Calls will be purchased if the stock moves approximately one Average True Range (ATR14 – 14 periods) into the profit zone. Subsequent Calls will be purchased at the .70 Delta for every ATR move into the Profit Zone. At this time there is no limit planned for trades that wind up being a significant portion of the portfolio due to their profitability. This may change as the strategy is implemented.

RULES: Please see trade notes below for more details on the statistics of of this trade. (1) Enter when the stock moves above the 50 Day SMA. This gets a little tricky. Scenarios: (a) Stock opens below the 50 Day SMA and then steadily rises above the 50 Day SMA and closes over the moving average. No trade management needed. (b) Stock gaps above 50 SMA. Buy at the open, if the stock starts moving backward buy a Put hedge or sell the Call.  (c) Stock opens below the 50 Day SMA and then steadily rises above the 50 Day SMA and then vacillates above and below the 50 Day SMA. You can either bale out or buy a Put and see where the dust settles. If the movement from the open is serious, buying the Put might be a better solution. If there was very little movement to the 50 Day SMA, it might just be wise to bail or to see where the dust settles. A move of ten to twenty percent on a $100 – $250 option contract is hardly going to break the bank.Tomorrow might offer a clear picture of what needs to be done.

TRADE NOTES: It is my perception that the most relevant trades are the most recent or trades that are looked at with specific market conditions. I think that trades made in the past year are more relevant than trades made in 1950. I think that trades made only in markets going up are not as relevant to trades that are loosing money as trades made in down markets. No matter what, you cannot predict the future with certainty, but you are foolish not to at least assess the probability of an event happening. For approximately 30 years I wrote code for a living. For five of those years I wrote simulations and did statistical analysis for a university with an enrollment of over 30,000 students. For 20 years I was an accounting systems freelance programmer responsible to make sure income statements, balance sheets and cash flow statements were correct. I also made customizations to customer’s software, primarily in the Inventory, Sales Orders, Account Receivable, Payroll and Materials Requirements Planning modules. For five years I wrote software to help me manage my personal portfolio during a period in which I lived strictly off of my investments. One day I realized that entries and exits are important, but the real strength of any trader is in the Management of the Trade. That’s really the reason for this discussion.

Simulations: Sim1: In this simulation I took a look at approximately one year of trades (249) from March 12, 2018 to March 8, 2019. The simulation included 532 stocks that have weekly options. The stock was bought when closed above the 50 Day SMA after it crossed above the 50 Day SMA and had closed below the 50 Day SMA the day before. The trade was closed when the stock closed above the 50 Day SMA on the previous day and it closed below the 50 Day SMA.on the day of the trade close. It should be noted that the close  values might well be the simplest values to use in determining profit for each trade. The were originally used in the simulations but the results were but the profit resulting from using the closes was so poor as to profit potential to render them not worth the time not the profit. However, when the close was substituted with opening above the 50 SMA  and the crossing of the 50 SMA as the buy and sell points, the trades became worthy of consideration. The problem with using opening and crossing values is that the trades now require some management. In Sim1 there were 3,855 opening trades in the 249 days for an average of 15.48 trades a day to open positions. Note that there will also be about 15.48 closing trades a day on average. That’s a lot (too many?) trades. The trades made a total of 7,860.54 percent in profit over the 249 days for an average of 31.57% for each day of the period or about .05934% per stock per day. The average gain for each stock was 14.78% for the 249 days or about 1.23% per month. This result was with some simple fundamental trade management. Buy at an opening above or a crossing of the 50 Day SMA. Sell at an opening below or a crossing below the 50 Day SMA which results in a closing. Not a lot of management was involved. No hedging needed to be done.