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. How do I use Exponential Moving Average (EMA) to create a forex trading strategy?

    Use the exponential moving average (EMA) to create a dynamic forex trading strategy. Learn how EMAs can be utilized very ... Read Answer >>
  2. How do I use Percentage Price Oscillator (PPO) to create a forex trading strategy?

    Learn a basic forex trading strategy that can be implemented using a trading signal generated by a crossover movement by ... Read Answer >>
  3. 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 >>
  4. What are the main disadvantages of using the Exponential Moving Average (EMA)?

    Discover the primary differences between exponential and simple moving average indicators, and what disadvantages EMAs can ... 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. 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 >>
Related Articles
  1. Trading

    Simple Vs. Exponential Moving Averages

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

    Adapt The 50-Day EMA To Enhance Your Trading

    The 50-day EMA has numerous applications in price prediction, position choice & strategy building
  3. Investing

    Moving Average Bounce

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

    The 5-Minute Forex "Momo" Trade

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

    How To Use A Moving Average To Buy Stocks

    The Moving Average indicator is one of the most useful tools for trading and analyzing financial markets.
  6. Trading

    Measuring Stock Market Sentiment With Extreme Indicators

    Pay attention to how the exhaustion principle helps technical indicators signal trend reversals when abrupt value changes coincide with high trading volume.
  7. Trading

    Triple Screen Trading System - Part 3

    Learn about market wave, the second screen in this three-part system.
  8. Trading

    Do Adaptive Moving Averages Lead To Better Results?

    These complex indicators can help traders interpret trend changes, but are they too good to be true?
  9. Trading

    How to Become a Successful Forex Trader

    Discover a framework that will help you build your own profitable forex trading strategy.
  10. Trading

    Adjusting Strategies to Moving Average Slopes

    Managing interrelationships between price, moving averages and slope can shift the reward: risk equation in your favor.
RELATED TERMS
  1. McClellan Oscillator

    A market breadth indicator that is based on the difference between ...
  2. True Strength Index - TSI

    A technical momentum indicator that helps traders determine overbought ...
  3. Moving Average - MA

    A widely used indicator in technical analysis that helps smooth ...
  4. Elder-Ray Index

    A technical indicator developed by Alexander Elder that measures ...
  5. Double Exponential Moving Average - DEMA

    A technical indicator developed by Patrick Mulloy that first ...
  6. Simple Moving Average - SMA

    A simple, or arithmetic, moving average that is calculated by ...
Hot Definitions
  1. Call Option

    An agreement that gives an investor the right (but not the obligation) to buy a stock, bond, commodity, or other instrument ...
  2. Pro-Rata

    Used to describe a proportionate allocation. A method of assigning an amount to a fraction, according to its share of the ...
  3. Private Placement

    The sale of securities to a relatively small number of select investors as a way of raising capital.
  4. AAA

    The highest possible rating assigned to the bonds of an issuer by credit rating agencies. An issuer that is rated AAA has ...
  5. Backward Integration

    A form of vertical integration that involves the purchase of suppliers. Companies will pursue backward integration when it ...
  6. Pari-passu

    A Latin phrase meaning "equal footing" that describes situations where two or more assets, securities, creditors or obligations ...
Trading Center