Suitable for almost any trader, the floor trader's setup is known as one of the best SMA strategies around. Here's the complete guide to the must-try method.

Simple Moving Average

Moving averages are arguably the most popular technical indicators out there, known for their simplicity and proven track record of adding critical value to traders' analyses. Moving averages could help us confirm and ride the trend.

We can utilize them to identify support and resistance levels, stop loss and take profit areas, and, most importantly, catch the underlying trend. Such versatility is what makes them so significant for most traders.

If you look up moving averages trading strategy online, you will find many variations. However, not all are fully applicable because some methods only work under certain conditions.

Today we will introduce the floor trader's setup, which is suitable for the trending market and perhaps the best SMA strategy. The goal is to provide all of the basic rules and the trading setup so you can try it out yourself.

 

Understanding the System

First, the floor trader's setup is a retracement method, which uses minor price reversals within a bigger trend. Note that the price only reverses temporarily instead of entirely changing direction, so it does not indicate a change in the primary trend.

This strategy combines the trend identification properties of moving averages with pattern recognition entry techniques. The key to this trading system is attempting to buy or sell when a minor reversal happens.

Here's a closer look into retracement patterns:

Retracement example

In this strategy, the first thing you need to do is to identify the trend by doing the following things:

  1. Place moving average lines and find the crossovers to figure out the trend. Typically, traders use 9 SMA and 18 SMA.
  2. Once the two moving averages cross over, it signals a change in the trend. The trend increases if the faster 9 SMA crosses above the 18 SMA. A crossing of 9 SMA from 18 SMA suggests the trend is decreasing.

Understand that the crossovers do not indicate the buy and sell signals. Once you find the trend cycle, look for retracements that happen against the trend, and when it does, keep your focus on a simple pullback candlestick formation. That is the signal you're looking for.

Although the basic moving averages are 9 SMA and 18 SMA, you can try other combinations such as 7 SMA & 14 SMA, 10 SMA & 20 SMA, or 25 SMA & 50 SMA. The trading rules are the same.

You can also use any time frame, but using short-term time frames on currency pairs with large spreads is not advisable. If you are trading currency pairs with large spreads, it's best to use at least 15 minutes time frame or above.

 

Identifying Trading Signals to Buy or Sell

There are several things you need to understand before trading with this strategy. First, three different entry levels come with varying degrees of risk; level 1 is the most conservative, while level 3 is the most aggressive.

You'll find out how to identify each level in this section. Second, to optimize your performance, it would be very helpful if you're already familiar with reversal candlestick patterns, as they are the ones you will rely on to look for the entry signals.

 

Buy Rules

  1. See if the 9 SMA crosses 18 SMA to the upside, indicating the trend is increasing. You want to see the price moving away or staying above the moving average lines without touching them, but later, it should reverse and come down to touch either one or both of them.
  2. Once the price returns and touches the SMA lines, look for a "bounce" up signal confirmed by a reversal candlestick pattern.
  3. Set a buy stop order above the high of the reversal candlestick.
  4. Place a stop loss around 5-10 pips below the low of the reversal candlestick pattern.

Floor Trading Setup - Buy Rules

The levels of buy entry signals are as follows:

  • Level 1 – The price goes lower, enters the MA zones, and touches the 18 SMA line. Wait for a rally that breaks above the high of the preceding price bar and buy after a bar with a higher high formed.
  • Level 2 – The price declines and goes between the MA lines, but the price reversal pattern occurs just after it touches the 9 SMA. In other words, the price begins to rally without touching the 18 SMA.
  • Level 3 – The price bar reversal occurs above both lines after a shallow retracement.

 

Sell Rules

  1. See if the 9 SMA crosses 18 SMA to the downside, indicating that the trend is moving down. You want to see the price moving away from the moving average lines without touching them, but later, it should reverse and come up to touch either one or both of them.
  2. Once the price returns and touches the SMA lines, look for a "bounce" signal shown by a reversal candlestick pattern.
  3. Place a sell stop order below the low of the reversal candlestick pattern.
  4. Place a stop loss at least 5-10 pips above the high of the reversal candlestick pattern.

Floor Trading Setup - Sell Rules

The levels of sell entry signals are as follows:

  • Level 1 – The price increases, enters the MA zones, and touches the 18 SMA. Wait for a rally that breaks below the low of the preceding price bar and sell following a bar with a lower low after the reversal pattern.
  • Level 2 – The price moves upward and goes between the MA lines, but the price reversal pattern occurs right after it touches the 9 SMA. In other words, the price begins to rally without touching the 18 SMA.
  • Level 3 – The price bar reversal occurs below both MA lines after a shallow retracement.

 

Extra Tips on the Floor Trader's Setup as the Best SMA Strategy

Once you get the hang of the basic trading rules, here are some extra tips to improve your trade even more:

  • Use level 3 entries only if they are the first buy or sell signal in a new trend cycle.
  • The slopes of the two SMA lines must stay positive during the retracement.
  • The best kind of retracement is smooth and orderly.
  • The ideal pullback should last for at least two to five price bars.
  • Use bar patterns to filter entries.

Moreover, there are a few exceptions that you should consider in your trades:

  • The 9 SMA must not always be above or below the 18 SMA. You can proceed if the 9 SMA is just about to cross above (for buy entries).
  • You don't have to wait for both the SMA lines to slope up or down. One sloping line is actually enough.
  • The price does not have to trade above (for buy entries) the two SMAs for three consecutive bars. You're good to go if the price exceeds the two SMA lines.

 

Is There Any Downside?

Like any other strategy, the floor trader's setup has flaws. While this system can be extremely useful in trending markets, it performs pretty poorly in ranging markets as it can give many false signals. You should watch and analyze the market's trend closely; to ensure it's suitable for this retracement strategy.

Another downside is that in fast-moving markets, the price will move away from the moving average indicators for a long time before returning to them. If you stumble across this market condition, it's best to avoid trading it.

 

The Bottom Line

The floor trader's setup is one of the most popular strategies, which is unsurprising because, if done correctly, this system can give you fantastic returns in trending markets. The best SMA strategy is excellent, even for novice traders with limited technical trading knowledge.

It relies strongly on price action and can combine the trend confirmation element of moving averages with entry signals shown by price reversal patterns. Not only that, but the method also comes with three different entry levels, giving more room for traders to assess the situation and decide which entry point is the best.

This strategy is not limited to a specific group of traders or trading styles, so it suits various scenarios. However, keep in mind that it's not free of risk and should be used with caution.