January 28, 2008
Here's A Simple But Effective EMA Forex Trading System…
It's often argued that the most simple straight-forward forex trading systems are often the most effective, and the following system is a classic example where this is the case.
This system is used by a lot of traders, including myself, and is generally very effective. Best of all it doesn't use lots of fancy technical indicators, it just uses nothing more than basic moving averages, and specifically EMA's (exponential moving averages).
An important part of this strategy is to identify the longer term trend. I personally trade off the 4-hour charts for this strategy, so I therefore look at the daily and weekly charts to see if we're trending upwards or downwards. If both are trending in the same direction, I will then look to open a trade on the 4-hour chart in the same direction as both the daily and weekly trend.
On the 4-hour charts I use just two indicators - the EMA(5) and EMA(20). The signal comes when the EMA(5) crosses the longer term EMA(20) in the same direction as the overall longer-term trend.
You also want to ideally enter the trade when the price retraces towards the EMA(5) just after crossing in order to get maximum value from your position.
You can exit your position either when the EMA(5) crosses in the opposite direction, or you can exit after a set number of pips or in stages. It's entirely up to you.
If you let these positions run until their conclusion when the EMA(5) crosses back, you can often yield several hundred pips. I personally like to move my stop loss to break even as soon as the position's showing a decent profit, and let it run as long as possible, trailing the stop along the way.
Let me give you an example of a trade I placed a few weeks ago that netted over 250 points profit on the GBP/USD.
It was clear that both the daily and weekly charts were trending downwards, so I looked to go short when the EMA(5) crossed the EMA(20) and this is what subsequently happened:
This is a very basic strategy but it can often yield several hundred pips, as it did in this instance. Of course you do occasionally get short crossovers which quickly reverse, which is why you need a good stop loss strategy, but if you always trade with the longer term trend and let your positions run, then you can net some excellent profits.
Furthermore, if you are a patient long-term trader, you can potentially rack up some huge gains, as crossover trends can carry on for months, or even longer in daily or weekly charts, for example.
Just take a look at the GBP/USD weekly chart over the last two years. The EMA(5) crossed upwards through the EMA(20) in April 2006, and assuming you went long at say 1.7900 and held on until the EMA(5) crossed back below the EMA(20) in late 2007 and closed at 2.0200, you could have profited to the tune of 2300 points (and 3260 if you'd closed at it's high of around 2.1160).
(Disclaimer: This does not constitute financial advice. This is just an example of one of my own trading strategies, and in no way guarantees that you will obtain the same results yourself).