The use of exponential moving averages (EMAs), specifically the 5 and 20-period EMAs, constitutes a fundamental strategy in forex trading. These EMAs offer insights into the current trend dynamics. When a shorter-term moving average, such as the 5 EMA, crosses a longer-term one, like the 20 EMA, it signifies a potential trend change, presenting an opportune moment to enter a new position at the inception of a trend.
Strategies to Bolster Success Rates
While this strategy isn’t foolproof due to occasional false crossovers, employing multiple time frames can significantly improve its reliability. For instance, examining an upward price move across daily and 4-hour charts and waiting for a retracement on the 1-hour chart before entering a long trade upon the 5 EMA crossing over the 20 EMA can align with the longer-term trend.
Consider, for instance, the scenario where the USD/JPY exhibited an upward move on higher time frames but retraced as the 5 EMA crossed below the 20 EMA on the 1-hour chart before resuming its upward trend, providing an optimal entry point.
Preference for Longer Time Frames
In general, focusing on longer time frames tends to be more profitable due to larger price movements. Smaller time frames often yield more limited moves, and the impact of spreads can significantly eat into potential profits.
The Crucial Success Factor
Success in this strategy lies in identifying currency pairs exhibiting strong trends across longer time frames and initiating a trade when an EMA crossover aligns on a shorter time frame in the same direction. This approach, known for its high probability, frequently results in profitable trades.
Strategic Exit Points
There exist several exit strategies. One approach involves holding the position until EMAs reverse, potentially yielding significant returns. Another method is to set a specific pip target per trade and adjust the stop-loss to breakeven once the trade is in profit.
The EMA crossover strategy offers a range of profitable options, requiring just two simple technical indicators. There’s no strict adherence to the 5 and 20-period settings; experimenting with different combinations, like the 10 and 20-period EMA crossover strategy, might yield similar favorable outcomes.
Additionally, adopting a longer-term perspective by observing the death cross (downward crossover) and golden cross (upward crossover) of the 50 and 200-day EMAs can prove highly profitable during substantial price movements if timed adeptly.