Now, because this forex trading strategy involves 3 EMAS, it may be quite hard to understand at first (if you are beginner forex trader) therefore I suggest your read not only once but 2-3 times to fully understand and then also refer to the chart below.
Let’s get started.
Timeframe: Any (but the suggest using 15min timeframes and above)
Currency pair: Any
Indicators: 10 ema, 25 ema and the 50 ema.
THE 3 EMA FOREX TRADING STRATEGY RULES:
- Place a buy stop pending order 2-5 pips above the the high of the candlestick which has a lower high than the previous candlestick after the 10 EMA crosses the 50 EMA to the upside.
- If the next candlestick breaks the high of the previous candlestick, this pending buy stop order will be activated. But if not, keep moving the pending buy stop pending order above each new lower high candlestick that forms until the high is broken and trade is activated.
- Place your stop loss 2-5 pips below the low of the candlestick that has its high broken which then activated your buy stop order. However, if there is a nearby, swing low point (support level), then its best to use that as well and place you stop loss a few pips outside of the support level.
- Place a sell stop order 2-5 pips below the low of the candlestick which has a higher low than the previous candlestick after the 10 EMA crosses the 50 EMA to the downside.
- If the next candlestick breaks the low of the previous candlestick, this pending sell stop order will be activated. But if not, keep moving the pending sell stop order below each new higher low that forms until the low of the previous candlestick is broken and trade is activated.
- Place your stop loss 2-5 above below the high of the candlestick that has its high broken which then activated your sell stop order. However, if there is a nearby, swing high point (resistance level), then its best to use that as well and place you stop loss a few pips outside of the that level.
Here’s a chart explaining how to take the trade:
- You can use previous swing low levels as your profit target for a sell trade
- For buy trade, use previous swing high levels for your profit target.
- Or another option is not to have a profit target but use a trailing stop to place behind each lower swing high(for a sell trade) as your trade moves in favour so that your can ride out that trend for as long as you can extracting maximum pips out of the price swing until you get sopped out. For a buy trade, do the the exact opposite.
- One of the best way of trade management is to trail stop behind lower swing highs (for a sell trade) or trail stop below higher swing lows,
- This enables you to lock in profits as trade moves in favor until your profit target is hit or if you don’t have a profit target, you can ride our the trend as far as it can go until you get stopped out.
- See the attached chart above for more clarity regarding this.
ADVANTAGES OF THE 3EMAS FOREX TRADING STRATEGY
- A very simple forex trading strategy, easy to understand and use.
- In strong trending markets, there is potential to make large profits very quickly.
DISADVANTAGES OF THE 3 EMAS FOREX TRADING STRATEGY
- As usual, all moving average indicators including exponential moving averages are are lagging indicators, which means the at all time, price moves ahead and moving average comes later. Which means sometimes much of the price movement has occurred already before you enter a trade.
- Therefore, If price moves a great deal, when you enter a trade, it may be due for a reversal and this would also get you stopped out.
- This trading system will perform poorly in ranging markets giving you many false trading signals.
Now, some of you may still be confused about this forex strategy. You may wonder, why not initiate a trade when the 10ema crosses the 25ema on the very first instance? So let me summarize for you here:
- A trade is initiated on the FAILURE of the retracement that happens after the 10ema crosses the 50ema .
- the 50 ema line acts as a support if price is above it and acts a resistance when price is below it, therefore, to make sure that price does not bounce off from this 50 ema line, the 10 ema must cross the 50 ema before a trade can be taken.
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