Because moving averages are a lagging indicator, the crossover technique may not capture exact tops and bottoms. But it can help you identify the bulk of a trend. All you have to do is plop on a couple of moving averages on your chart, and wait for a crossover. If the moving averages cross over one another, it could signal that the trend is about to change soon , thereby giving you the chance to get a better entry.
From around April to July, the pair was in a nice uptrend. It topped out at around If you had shorted at the crossover of the moving averages you would have made yourself almost a thousand pips! Of course, not every trade will be a thousand-pip winner, a hundred-pip winner, or even a pip winner.
It could be a loser, which means you have to consider things like where to place your stop loss or when to take profits. What some traders do is that they close out their position once a new crossover has been made or once the price has moved against the position a predetermined amount of pips. She either exits when a new crossover has been made but also has a pip stop loss just in case.
These impatient souls make perfect momentum traders because they wait for the market to have enough strength to push a currency in the desired direction and piggyback on the momentum in the hope of an extension move. However, once the move shows signs of losing strength, an impatient momentum trader will also be the first to jump ship.
Therefore, a true momentum strategy needs to have solid exit rules to protect profits , while still being able to ride as much of the extension move as possible. The 5-Minute Momo strategy does just that. The five-minute momo looks for a momentum or "momo" burst on very short-term five-minute charts. First, traders lay on two technical indicators that are available with many charting software packages and platforms: the period exponential moving average EMA and moving average convergence divergence MACD.
EMA is chosen over the simple moving average because it places higher weight on recent movements, which is needed for fast momentum trades. While a moving average is used to help determine the trend, MACD histogram , which helps us gauge momentum, is used as a second indicator. This strategy waits for a reversal trade but only takes advantage of the setup when momentum supports the reversal enough to create a larger extension burst.
The position is exited in two separate segments; the first half helps us lock in gains and ensures that we never turn a winner into a loser and the second half lets us attempt to catch what could become a very large move with no risk because the stop has already been moved to breakeven. Here's how it works:. Although there were a few instances of the price attempting to move above the period EMA between p.
We waited for the MACD histogram to cross the zero line, and when it did, the trade was triggered at 1. We enter at 1. Our first target was 1. It was triggered approximately two and a half hours later. We exit half of the position and trail the remaining half by the period EMA minus 15 pips. The second half is eventually closed at 1. ET for a total profit on the trade of The math is a bit more complicated on this one.
The stop is at the EMA minus 20 pips or The first target is entry plus the amount risked, or It gets triggered five minutes later. The second half is eventually closed at ET for a total average profit on the trade of 35 pips. Although the profit was not as attractive as the first trade, the chart shows a clean and smooth move that indicates that price action conformed well to our rules. We see the price cross below the period EMA, but the MACD histogram is still positive, so we wait for it to cross below the zero line 25 minutes later.
Our trade is then triggered at 0. As a result, we enter at 0. Our stop is the EMA plus 20 pips. At the time, the EMA was at 0. Our first target is the entry price minus the amount risked or 0. The target is hit two hours later, and the stop on the second half is moved to breakeven. We then proceed to trail the second half of the position by the period EMA plus 15 pips. The second half is then closed at 0.
In the chart below, the price crosses below the period EMA and we wait for 10 minutes for the MACD histogram to move into negative territory, thereby triggering our entry order at 1. Based on the rules above, as soon as the trade is triggered, we put our stop at the EMA plus 20 pips or 1. Our first target is the entry price minus the amount risked, or 1.
It gets triggered shortly thereafter. The second half of the position is eventually closed at 1. Coincidentally enough, the trade was also closed at the exact moment when the MACD histogram flipped into positive territory.
As you can see, the five-minute momo trade is an extremely powerful strategy to capture momentum-based reversal moves. However, it does not always work, and it is important to explore an example of where it fails and to understand why this happens.
As seen above, the price crosses below the period EMA, and we wait for 20 minutes for the MACD histogram to move into negative territory, putting our entry order at 1. We place our stop at the EMA plus 20 pips or 1.
But opting out of some of these cookies may have an effect on your browsing experience. Necessary Necessary. Necessary cookies are absolutely essential for the website to function properly. This category only includes cookies that ensures basic functionalities and security features of the website. These cookies do not store any personal information. Non-necessary Non-necessary.
Any cookies that may not be particularly necessary for the website to function and is used specifically to collect user personal data via analytics, ads, other embedded contents are termed as non-necessary cookies. We need to outline a simple trading strategy based literally on a moving average and some basic understanding of how price works. Believe it or not, we are ready to go! For us, things get interesting when the price returns to the EMA after being away from it for a while. If you have followed the moving averages closely in the past, you will probably realize that I am primarily alluding to the trend of price action.
When the price moves sideways, the moving averages tend to move closer and be confused with the ongoing move, which often hits the price. For systems based on moving averages, this can kill the account. As a simple filter for this problem, you should only be interested in that the price touches the EMA after relatively spending some time away from it, for example, when it breaks out of a decent trend.
The Chart above illustrates this. Take a look at some points on the same diagram that may interest us:. Notice how each of the three hits of the 50 EMA noted above results in a bounce and that they occur as a continuation of a previous strong move. Very often, the price bounces off the EMA the more time you spend out of it.
And the level of resistance. Found this to be a fantastic filter. Sure, miss some trains, but the ones do on, enjoy the ride like hell, well, most of all! If you can learn to combine the two and are tired of the EMA catching up too much with recent price action, you have a powerful and effective trading system that is simple and powerful. Read More : When is the best time to trade Forex?
This approach allows you to execute the order when the 50 EMA is touched. The stop loss should be arbitrarily placed several pips above or below your entry point, depending on the circumstances. Note that such a trigger would work great in the third last example posted in the previous section.
The price reaches the EMA and bounces strongly. This will mark good moments; you know where to put your glasses and act as the hero of your story. Often the price hits and bounces off the EMA to the touch, without necessarily signaling price action to conservative traders hint: alternative approach. The downside, of course, is that using blind trading and holding arbitrary stops carries significant risk. In reality, you never know for sure how many pips you need for a reliable stop loss.
Keep it wide enough, and you will screw up your home entry target 50 EMA where you expect a bounce , ruining your risk-reward ratio. Hold it too tight, and you risk getting pulled out without necessarily being wrong and it hurts like hell! It will depend on the market you are trading in, your experience with the method and blind trading, and of course, the robustness of the setup itself. We have a pullback to the 50 days moving average and a nice merge with the wedge pattern and horizontal support and resistance levels.
The stop here must be very wide to accommodate this false upward movement. There is an alternative approach for those who like a calm and relaxed life where you can wait for a specific price action signal on a EMA bounce on a candlestick pattern, such as a pin bar or a pattern.
Sure, miss some trains, but the ones do on, enjoy the ride like hell, well, most of all! If you can learn to combine the two and are tired of the EMA catching up too much with recent price action, you have a powerful and effective trading system that is simple and powerful. Read More : When is the best time to trade Forex? This approach allows you to execute the order when the 50 EMA is touched.
The stop loss should be arbitrarily placed several pips above or below your entry point, depending on the circumstances. Note that such a trigger would work great in the third last example posted in the previous section. The price reaches the EMA and bounces strongly. This will mark good moments; you know where to put your glasses and act as the hero of your story. Often the price hits and bounces off the EMA to the touch, without necessarily signaling price action to conservative traders hint: alternative approach.
The downside, of course, is that using blind trading and holding arbitrary stops carries significant risk. In reality, you never know for sure how many pips you need for a reliable stop loss. Keep it wide enough, and you will screw up your home entry target 50 EMA where you expect a bounce , ruining your risk-reward ratio. Hold it too tight, and you risk getting pulled out without necessarily being wrong and it hurts like hell! It will depend on the market you are trading in, your experience with the method and blind trading, and of course, the robustness of the setup itself.
We have a pullback to the 50 days moving average and a nice merge with the wedge pattern and horizontal support and resistance levels. The stop here must be very wide to accommodate this false upward movement. There is an alternative approach for those who like a calm and relaxed life where you can wait for a specific price action signal on a EMA bounce on a candlestick pattern, such as a pin bar or a pattern. Suppose you have noticed that this previously published setting is a tutorial for conservative operators.
It shows a good pin bar from the day moving average and horizontal support and resistance levels. You can now open trade as you normally would if you were trading pin bars. That is, opening an entry at the breakout of the pin bar with a stop loss objectively! Placed at the breakout of the other end of the bar. I prefer to wait for price action to confirm because I have been an avid fan of candlestick patterns during my trading career. Although I also make cash trades from time to time when I see a mountain of the very obvious confluence of support and resistance areas lining up at the point of contact.
Well, this sums up this super simple trading strategy. You will learn step by step about our precise trading method with additional tips and notes on price action and technical analysis in our professional area. Save my name, email, and website in this browser for the next time I comment.
Attachment The maximum upload file size: 5 MB. You can upload: image , audio , video , document , spreadsheet , interactive , text , archive , other. Links to YouTube, Facebook, Twitter and other services inserted in the comment text will be automatically embedded. After all, a minor retracement can tilt the EMAs at a much faster rate compared to SMAs, which can send a false reversal signal. Basically, using EMAs will get you into a trade earlier, but you might get out of the trade based on a false reversal signal.
By contrast, using SMAs will get you into a trend later, but you will likely ride it longer because there will be less false signals about reversals. However, if you are following a trend, using SMAs will lag more to a change in trend and you may leave a lot of profits on the table. Hence, it makes sense that we try to develop trading strategies where the SMAs will generate an entry signal to trade and help minimize false signals, where using EMAs will generate exit signals. Because it is more important to get it right when entering the market than leaving some profits on the table.
However, to keep things simple, we will use EMAs to demonstrate how you can use moving averages in your trading strategies. Here, we will look at six of the most effective ways you can trade with moving averages. Moving average crossover is one of the most popular trading strategies and it is popular for a good reason.
Since moving averages smooth out price action, when a lower period moving average crosses above or below another higher period moving average, it confirms that the direction of the price has changed. While you can use any moving average, be it the combination of 5 and 10, or 15 and 30, the best crosses are always based on the Fibonacci sequences such as 5, 8, 13, 21… etc. Since professional and institutional traders often use Fibonacci numbers moving average crosses, it ends up acting as a self-fulfilling prophecy as well.
Under the circumstances, whenever a shorter period MA crossover happens, here we used EMA 5 and 13 cross — both Fibonacci numbers , you can consider placing a new buy order to keep scaling into your position and ride the long-term trend. During a downturn, the price will remain below the EMA and the shorter period MA crosses will signal sell orders. Trading a trend would be much easier if there were no pullbacks and it often confuses beginner traders. However, there is a nifty way to identify if crossover in the opposite direction is a retracement or really a reversal.
For this, you need an oscillator indicator on your chart, such as the Stochastics indicator. In figure 3, we can see that during the uptrend, the EMA 5 and 13 crossed several times in the opposite direction. But every time, the Stochastics turned oversold fairly quickly as it fell below the 20 level when this happened, but the EMA 5 and 13 do not fall below the previous lows, it signals a retracement and not a complete reversal of the trend.
The concept used here is called a divergence. If you find such divergence in the market, wait for the shorter period EMAs crossover to signal that the trend has resumed and then, enter the market again. This way, you can keep following the trend and scale in to maximize your profit from a single long-term trend. Most currency pairs remain range-bound for the majority of the time and trends only occasionally. However, getting into a trend at an early stage yield the highest reward to risk ratio trades.
Most beginner traders consider using trend lines to follow a trend. However, there are some major problems with using trend lines and trading trends with moving averages is a better strategy than solely relying on trend lines. Trend lines are great at forecasting potential support and resistance levels during an uptrend and a downtrend, respectively.
But, the slope of the trend line can differ. If you are not careful; you might end up getting out of a trade too quickly if the angle of the slope of the trend line is too much. On the other hand, you might allow a retracement to eat up the bulk of your unrealized profits if the slope of the trend line is too low.
Moreover, the problem with trading trends with trend lines is sustained retracements. During an uptrend, a Forex pair might start a multi-stage retracement that breaks the uptrend line and similar things can happen during a downturn as well. If you were using a period EMA, you would still consider it as an uptrend and may re-enter the market based on shorter period MA crosses.
Hence, knowing how to differentiate a retracement from an actual reversal of the trend can end up separating the profitable trend following strategies from the rest. It is common sense that you should not trade against the trend. Therefore, longer period moving averages can help you identify a long-term trend. But, at the same time, using a shorter period moving average can generate an early signal to identify when is the right time to enter the market and when to get out.
Moving averages can help you get into a trade and continue following a trend. But you can also use moving averages to get out of the trade without sacrificing the bulk of your unrealized profits. If you wait for an MA cross to happen in the opposite direction to get out, it might be too late.
By contrast, if you simply place a stop-loss order above the moving average during a downtrend or below the moving average during an uptrend to set a stop loss, the price may test the moving average and resume the trend, taking you out of the trade. Hence, the best way to get out of a trade would be waiting for the price to close above or below the higher period moving average in a cross before you can take some profits off the table.
However, when a bullish bar finally closed above it, only then the bullish retracement found some momentum. If you have waited for the moving average cross in the opposite direction, you would have left around 17 pips on the table! Most moving average strategies are focused on following trends and it is fundamentally different from setting a predefined arbitrary profit target like pips or pips based on your reward to risk ratio expectations.
Trend traders simply try to let their profitable trades run until the market itself provides ample reasons to get out of a trade. Hence, the best way to take profit when applying moving average based strategies would be to get in and out of a trend using the stop loss strategy we discussed above. However, if you see the price moving closer to strong support or resistance during a trend, you can always scale out and take some profits off the table.
The two most common MAs are the simple moving average (SMA), which is the average price over a given number of time periods, and the exponential moving average (EMA), which gives more weight to recent prices. Both of these build the basic structure of the Forex trading strategies below. The strategy relies on exponential moving averages and the MACD indicator. As the trend is unfolding, stop-loss orders and trailing stops are used to protect. The moving average (MA) indicator is one of the most used technical indicators for forex traders. It's a formula used to calculate the averages of a.