Lately I’ve been looking for a system easy enough for a relative novice to understand, but still with enough “safeguards” to keep you out of trouble. The answer came in the form of the “Simple Balanced System”. It uses two Exponential Moving Averages (one with a period of 5 and one with a period of 10), Relative Strength Index (RSI) with default settings of 14 and the Stochastic indicator with settings of 14, 3, 3. If you never heard about RSI or Stochastic, don’t worry because I am going to tell you a little about them before starting to explain how to use the strategy. It wouldn’t be right to trade a strategy without knowing about the indicators involved. Since the Moving Averages were already covered in a previous article, here we go with the RSI and Stochastic.
Relative Strength Index
Commonly commonly known as RSI it is an oscillator and a leading indicator. It is an oscillator because…it oscillates between 0 and 100 values. It will never go above 100 or below 0, but these levels are not as important as the 70 and 30 levels. Those levels are highly related to the fact that RSI is a leading indicator, meaning that it can signal price reversal even before it happens. To make the long story short, once the RSI moves above the 70 level, we consider the asset Overbought and a drop in price is expected. On the other hand, once the RSI goes below the 30 level, we consider the asset Oversold and a possible rise in price might occur. I am not going to go into details regarding the math formula behind the RSI because we just need to know how to use it, not the calculation behind it.
is also an oscillator (it moves between 0 and 100) and a leading indicator as it also signals Overbought or Oversold conditions, but there are some differences between the two indicators: the Stochastic uses the 80 and 20 levels for identifying Overbought or Oversold and it is composed of two lines, not just one like the RSI. The fact that it has two lines gives us another signal: the Stochastic Cross. This signal is used in some strategies, but it is of no use to us in the “Simple Balanced System”. Anyway, I know some of you are curious so I am going to explain it a little: a bearish cross occurs when both lines are above the 80 level and the faster line crosses the slower line downward. A bullish cross occurs when both lines are below the 20 level and the faster line crosses the slower going upwards. The Stochastic cross can also occur between the 80 and 20 levels, but that is considered a weaker signal. Now that you know a little about the two indicators, let’s move on to the actual system.
How to use the Simple Balanced System
First of all, to plot the indicators on a Meta Trader 4 chart, go to Insert – Indicators – Oscillators and choose Relative Strength Index and then repeat the same procedure for Stochastic. If you are having problems with it, read my detailed article on how to use the Meta Trader 4 platform. For the two moving averages, follow the path: Insert – Indicators – Trend – Moving Average and select the exponential method. All of these are very common indicators so there’s a high chance that you will find them on other platforms, not only MT4. Ok, now we know how to display the indicators on a Meta Trader 4 platform so let’s go forth and look at the entry rules:
Bullish Trades (Buys and Calls)
For a bullish trade, we need the 5 EMA to cross the 10 EMA upwards + the RSI to be above the 50 level (this is not a default level so you will have to add it manually) + the Stochastic to be heading up but not in Overbought territory. We absolutely need all three conditions to be met at the time of entry; it will probably not happen simultaneously so wait until they are all met.
Summary and picture for a Bullish trade:
- EMA 5 crosses EMA 10 upwards
- RSI is above 50
- Stochastic is heading up but it is not in Overbought territory
Bearish Trades (Sells and Puts)
For a valid Bearish entry we need to reverse all three conditions: EMA 5 must cross EMA 10 downwards + the RSI must be below the 50 levels (drawn manually) + Stochastic needs to be heading down, but not in Oversold territory. Again, all three conditions must be met at the time of the entry.
Summary and picture for a Bearish trade:
- EMA 5 crosses EMA 10 downwards
- RSI is below 50
- Stochastic is heading down but it is not in Oversold territory
Trading FX, CFD, Crypto And BO With Simple Balanced System
The entry conditions are outlined above and basically the only difference is that for FX, CFD and Crypto, you will have to press the Buy or Sell button, while for Binary Options you will have to press Call or Put.
As for the exit conditions, these are a bit different: for FX, CFD and Crypto you will have to set some form of Stop Loss order, as well as Take Profit. Keep it simple and don’t overthink it: the Stop Loss can go behind the previous high or low (depending on the type of trade – buy or sell) and for Take Profit, use at least a 1:2 risk to reward ratio (meaning that for each 10 pips risked, you have the potential to make 20 pips). For Binary Options, use an expiry of 2 – 5 candles, depending on market conditions.
Why does the “Simple Balanced System” Suck?
As you can see from my trade examples above, once all the three conditions are met, the price quickly starts to move in my predicted direction, but keep in mind that I looked back on the charts to find those examples and in live market conditions, the situation can be quite different. This is not the Holy Grail of trading and sometimes the market can go against us much longer than we can stay solvent. Also, low volatility and ranging periods can produce false signals.
Why the “Simple Balanced System” doesn’t Suck?
Having three conditions that need to be fulfilled before placing a trade, this system keeps us out of many false moves and gives very accurate signals. The 50 levels of the RSI are often regarded as a trend confirmation and by only trading when this level is breached we are making sure we are going in the direction of the trend. As the 50 level is not a sure confirmation of a trend, we don’t trade it alone, instead, we have two other confirmations (EMA cross and Stochastic going down). I always say that we need more than one indication of price direction before placing a trade and the “Simple Balanced System” has three of them so in my opinion, it definitely doesn’t suck.
Wrapping It Up. Should You Use This System?
Never trust anyone when it comes to your hard-earned money! This being said, open up a Meta Trader 4 platform and backtest the system. Then back test it some more. When you are comfortable using it + get satisfactory results, start placing live trades but using less money than you usually do. When you see the system working and feel good about it, start using your normal trading amounts. Overall the Simple Balanced System” is a good one in my opinion and can bring profits but much discipline is needed from the trader as he/she must always wait for all the three conditions. Good luck if you need it!