20 Moving Average - Stop Trading Strategy

20MA Stop Trading Strategy – Introduction

The 20 Moving Average – Stop (or “halt play”) trading strategy is a strategy to profitably use the concepts of support and resistance to open a position after a trend has been confirmed by prices bouncing off certain resistance and support lines. In this case, we use the 20 Moving Average as a resistance line.

At a glance – 20 Moving Average – Stop Strategy

Time needed: 12 Minuten.

The 4 steps of the 20 MA trading strategy explained:

  1. Identifying resistance and breakthrough

    To get started with our strategy, we need a break of the 20 MA from the bottom to the top. The old resistance is now our support.

  2. Wait for the bounce

    After the breakout, we are now waiting for the price to fall back a bit and bounce off our bottom in the form of the MA 20.

  3. Entry and stop loss

    If both of the previous criteria are met, you can open your position on the close of the bounced candle and set a stop loss just below the 20 moving average.

  4. Take profits

    There are several options for taking profits. We recommend the combination of a take-profit at the last high point since the breakout and an individually set trailing stop.

Which indicators are needed?

For the execution of this trading strategy we only need the MA 20 (20 moving average). A moving average describes an average price over several price candles. Since we use the MA 20 in our case, we work with the average price of the 20 past closing prices (close prices). We use this trading strategy for Bitcoin and other assets. The MA 20 is used as support and resistance.

20 Moving average strategy – ceiling becomes floor

Support and Resistance with the 20 Moving Average - Stop Strategy
Support (floor) and Resistance (ceiling) in the MA 20 strategy

In the 20 MA strategy we use the concepts of so-called support and resistance levels:

  • Support / Floor: A support level is a level at which the price finds support when falling. It is thus slowed down, stopped or even bounces off the “floor” when falling. If such a support is broken by a certain amount by the price, the next support line is considered as a floor and the old support as a new resistance (ceiling).
  • Resistance / Ceiling: A resistance level (also resistance level) is the exact opposite of a support level. It is the price at which a price increase meets resistance, is slowed down or stopped as well, or bounces off the resistance to the downside. If the price breaks through such a ceiling from the bottom up, the probability that the price will continue to rise increases.

To understand the strategy presented in this article, another important aspect is necessary: If a price breaks through a resistance from below to the top, the previous ceiling becomes the new floor, i.e. the new support. If the price falls to the resistance line again – in our case on the 20 moving average – and bounces upwards, we have a double confirmation of the current trend and thus a statistically high probability for further rising prices in the immediate future.

How to trade the 20 moving average strategy

As soon as you have displayed the MA 20 on your exchange or TradingView and see the chart of the asset to be traded in front of you, you can get started. We recommend a 2-minute chart as the minimum and a 4-hour chart as the maximum suitable timeframe for this strategy.

Step 1: Detect ceiling (resistance) and breakthroughs

Resistance breakthrough
Breakthrough of the MA 20 resistance from the bottom to the top

Observe the price movements of your asset. If the price breaks through the MA 20, i.e. our resistance, from the bottom to the top, the first criterion for a position in our strategy is given. The previous ceiling has now become the new floor.

Step 2: Wait for the bounce

20 Moving average Rebound from support
Bounce from support

After our resistance at the 20 moving average has been broken, we wait for the price to fall back a bit and bounce off the resistance level now called the bottom. If the resistance line is not broken downwards, we speak of a confirmation. The occurrence of a confirmation increases the statistical probability for a further price development upwards.

From this bounce, – a stop of the price movement, – stems this strategy’s name. The price stops at the MA 20.

Step 3: Open position and set stop loss

Now that the price of our asset has bounced off the support after the previous breakout of the resistance, we open a long position. We are betting on further rising prices. If you are very sure, for example by using other indicators, that the price will continue to rise, you can open your position even before the close of the current candle and thus possibly pocket a few extra profits.

20 Moving Average - Stop Strategy - Entry and Stop Loss
Stop Loss Order and Entry at the close of the bounced candle

At this point, it is very important to set a stop-loss order to minimize your potential losses! We recommend to set the stop loss at least just below the 20 moving average, if not at the open price of the bounced price candle (see sample chart above). This way you can reduce potential losses to such an extent that the described strategy can be traded profitably in the long term.

Step 4: Take profit

MA Stop Strategy -Take Profit Example
Example of a take profit order with stop loss in profit

Realizing the profits – as with most strategies – is again up to you here and can be customized to your individual needs. Some possibilities would be:

  • Take profit order: Place a take profit order at the highest price that occurred between the breakout of the 20 MA from the bottom to the top and the bounce shortly before your entry. If you decide to take profit this way, we recommend to pull the stop loss into the profit area as soon as possible. This will help you to further limit your downside potential.
  • Re-trace a stop-loss order: Another option would be to adjust your stop-loss order manually. In doing so, you follow the current price development and pull up the stop-loss with a little distance. This way, on the one hand, you do not limit your profit from the outset by setting a take profit order at a fixed price and, on the other hand, you hedge your downside risk.
  • Trailing Stop Loss: A trailing stop is an order type that automatically follows the current price at a certain distance. This saves you the hassle of manually adjusting a stop-loss order, while still playing it safe in terms of your risk! One possibility for setting the trailing stop would be the same point at which you would have set the stop loss. You can additionally save yourself a stop loss if you use the automatic trailing stop.

Take profit order comparison

OrderDescriptionRiskProfitability
Take profit orderAutomatic profit taking at manually set price. Good for price targets.Very lowHigh
Stop loss orderAutomatic sell when falling back to a manually set price. Good for hedging.Rather lowLow
Trailing-stop orderAutomatic sell when the price automatically follows the price upwards with a manually set interval. Good for volatile assets.Rather lowMedium
Take profit order – variants in comparison

Conclusion on the MA20 – stop strategy

No matter which strategy of profit taking you finally decide on: With the 20 moving average stop strategy, it is particularly important to avoid realizing profits too late. Especially if you have chosen to trade in a smaller time frame such as the 5-minute chart, you may find yourself temporarily betting against the trend of a larger time frame. This small risk is countered by a flood of possible entry points that can make this strategy very worthwhile and rewarding in the long run.

If you have any suggestions or questions on the article, we are always happy to read your comments!

Frequently asked questions and answers about the MA20 – Stop strategy

Can I use the MA 20 stop trading strategy for short as well?

Yes, this strategy also works for short orders. Only the designation for support and resistance changes, the basic rules remain the same – although mirrored. We have summarized further information on opening and managing short positions using the example of Bybit in our Bybit Short Tutorial.

Do I have to use the MA 20 for this strategy?

No, for this strategy you can also use other moving averages like the MA 9 or the MA 200. However, we recommend the MA 20 because of its wide usage for the timeframes described in the article.

On which chart can I trade this strategy?

The 20 Moving Average – Stop trading strategy works on most timeframes. We recommend at least a 2 minute chart, – below that many price movements become too random – and a maximum of a 4 hour chart – above that you will very rarely have the opportunity to open new trades with this strategy.

Is the MA 20 – Stop strategy suitable for Bitcoin, Ethereum and other cryptocurrencies?

Yes, this strategy is based on very basic principles of technical chart analysis and simple market psychology. This makes it suitable for stocks and commodities as well as cryptocurrencies like Bitcoin.

Important risk notice:
This service or the provider advertised here is only suitable for professional traders. Users without sufficient experience usually suffer a total losswhile trading here. Trading with leverage is highly risky and leads to poor risk management. Use this service only as a professional trader with sufficient experience in trading and leverage.

Also in / Auch auf: Deutsch

Similar Posts

Leave a Reply

Your email address will not be published.