A:

A forex trader can create a simple trading strategy to take advantage of low-risk, high-reward trading opportunities using just a few moving averages (MAs).

Moving averages are perhaps the most commonly used technical indicators in forex trading. MAs are used primarily as trend indicators and also identify support and resistance levels. In forex trading, the 50-day, 100-day, and 200-day MAs are considered to represent significant support and resistance levels. The two most frequently used 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.

Outlined below is a trading strategy designed for short-term, intraday trading in the forex market. This trading strategy uses EMAs because it is designed to respond quickly to price changes.

• Plot three exponential moving averages – a five-period EMA, a 10-period EMA and 50-period EMA – on a 15-minute chart.

• Buy when price and the five-period EMA both cross from below to above the 50-period EMA, and the five-period EMA is above the 10-period EMA. (For a sell trade, sell when price and the five-period EMA cross from above to below the 50-period EMA.)

• Only take trade signals in the same direction as the trend shown by the 10-period EMA on the hourly chart. As long as the price is above the 10-period EMA on the hourly chart, then only buy trade signals are taken. If the price is below the 10-period EMA, only sell trades are entered.

• Place the initial stop-loss order below the 10-period EMA (for a buy trade), but no more than 10 to 12 pips from the entry price. Move the stop to break even when the trade is 10 pips profitable.

• The initial profit target is 20 pips, or the next identified support/resistance level. Since this is a short-term trading strategy, move the stop-loss aggressively as the profit showing in the trade increases.

Forex traders often use a short-term MA crossover of a long-term MA as the basis for a trading strategy.

RELATED FAQS
  1. What are the main advantages of using the Exponential Moving Average (EMA)?

    Learn the important potential advantages of using an exponential moving average when trading, instead of a simple moving ... Read Answer >>
  2. What are the main differences between Moving Average Convergence Divergence (MACD) ...

    Understand the exponential moving average, or EMA, and the moving average convergence divergence, or MACD, and their respective ... Read Answer >>
  3. What is a common strategy traders implement when using the Exponential Moving Average ...

    Learn a common strategy traders use in conjunction with the Exponential Moving Average indicator known as the moving average ... Read Answer >>
  4. How do I use McClellan Oscillator for creating a forex trading strategy?

    Learn how to construct a forex trading strategy using the McClellan oscillator technical indicator supplemented with a moving ... Read Answer >>
  5. What is the Moving Average Convergence Divergence (MACD) formula and how is it calculated?

    Learn the formula for the moving average convergence divergence momentum indicator and find out how to calculate the MACD ... Read Answer >>
  6. What is the difference between a simple moving and an exponential moving average?

    Learn about simple moving averages and exponential moving averages, what these technical indicators measure and the difference ... Read Answer >>
Related Articles
  1. Trading

    Simple Vs. Exponential Moving Averages

    These technical indicators help investors to visualize trends by smoothing out price movements.
  2. Trading

    This Indicator Should Always Be Part Of Your Strategy

    The relationship between price, 200-day EMA and its slope of generate useful patterns that assist in price prediction and trade management.
  3. Investing

    Moving Average Bounce

    Find out how this simple trading strategy can be added into your trading arsenal.
  4. Trading

    The Most Important Moving Averages For Investors (AAPL, TLT)

    Investors focus on fundamental criteria to choose portfolio candidates but adding moving averages to their analysis will improve long-term performance.
  5. Trading

    3 Nasdaq-100 Stocks With Bullish Crossovers

    50/200 moving average crossovers can detect trend changes before price action sets off broad based buy or sell signals.
  6. Trading

    The 5-Minute Forex "Momo" Trade

    Learn this simple momentum strategy and its profit protecting exit rules.
  7. Trading

    3 S&P 500 Stocks to Sell Short at the 50-Day EMA

    The 50-day EMA works well with other indicators to identify short sale opportunities with market laggards.
  8. Trading

    Use Moving Averages to Buy Stocks

    A moving average constantly updates a stock's average price, but it cannot predict a stock's performance.
RELATED TERMS
  1. European Medicines Agency (EMA)

    A centralized government body whose goal is to promote and protect ...
  2. Moving Average - MA

    A widely used indicator in technical analysis that helps smooth ...
  3. True Strength Index - TSI

    A technical momentum indicator that helps traders determine overbought ...
  4. Percentage Price Oscillator - PPO

    A technical momentum indicator showing the relationship between ...
  5. Crossover

    The point on a stock chart when a security and an indicator intersect. ...
  6. Golden Cross

    A crossover involving a security's short-term moving average ...
Hot Definitions
  1. Portable Alpha

    A strategy in which portfolio managers separate alpha from beta by investing in securities that differ from the market index ...
  2. Run Rate

    1. How the financial performance of a company would look if you were to extrapolate current results out over a certain period ...
  3. Hard Fork

    A hard fork (or sometimes hardfork) is a radical change to the protocol that makes previously invalid blocks/transactions ...
  4. Interest Rate Risk

    The risk that an investment's value will change due to a change in the absolute level of interest rates, in the spread between ...
  5. Ethereum

    Ethereum is a decentralized software platform that enables SmartContracts and Distributed Applications (ĐApps) to be built ...
  6. Zero Day Attack

    Zero Day Attack is an attack that exploits a potentially serious software security weakness that the vendor or developer ...
Trading Center