Next we plot a moving average of the points on our equity curve. It can be a simple moving average, or an exponential moving average or even some other, more complicated version, but for simplicity we’ll speak in terms of a "simple" moving average. If we use a 10-period SMA, we wait until we have at least 10 points on our equity curve and then plot a point which is the average of them all. As our equity curve changes while we trade, we continue to update the SMA with each trade we take and this will begin to form another line moving along with our equity.

Observing where our equity line is in relation to its moving average, we can make some trading decisions about how to deal with upcoming trades. For example, if our equity curve has dropped below the moving average, we would consider taking the next trade in a simulated mode. Many trading platforms offer the ability to switch between trading money from your live account, to simply paper trading in a simulated mode. We record the results of that simulated trade as if it were live and then recalculate our equity’s moving average. If the equity curve is still below its moving average, we continue to trade in simulation mode until the equity curve crosses back over the SMA and heads north.

There are many, much more complicated techniques that can be employed using this method, such as scaling the size of your positions in relation to your equity curve’s SMA. But in its simplest form, this technique has the uncanny ability to stop you from trading live as you enter losing streaks and then recognize when the winning streaks happening. Will you miss a few winning trades using this technique? Certainly, but the pros far, far outweigh the cons here because equity curve trading will keep you out of many, many more losing trades than winning ones. Employ this technique in your trading and you will be pleasantly surprised to look back and review the money you saved by staying out of losing streaks.

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