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.

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