The3step ema strategy for forex trends

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The3step ema strategy for forex trendsThe 3 Step EMA Strategy for Forex Trends

Talking Points:

EMAs are weighted averages used in trending markets. Find the trend with a 200 period EMA. Time entries using a series of EMAs utilizing smaller periods.

When it comes to trending markets. traders have many options in regards to strategy. Today we will review EMAs and how they can be used to create a complete strategy for Forex trends.

Lets get started!

Todays strategy will revolve around the use of a series of EMAs (Exponential Moving Average). These averages work the same as a traditional SMA ( Simple Moving Average ) by directly displaying an average of price for a selected period on the graph. However, the EMAs calculation incorporates a weight to put a greater emphasis on most recent price. This weight is placed to remove some of the lag found with a traditional SMA. This makes the EMA a perfect candidate for trend trading.

Now that you are familiarized with EMAs lets look at their uses in a trend trading plan.

Find the Trend

Before we enter into a trend based position, we need to know exactly which way that trend is heading. Below we have the GBPCAD on a 4Hour Chart. We can see the pair is making new highs while establishing higher lows. which makes the GBPCAD a strong candidate for an uptrend. This analysis can be confirmed by the use of a 200 EMA. Traditionally traders are bullish when price is above the 200 EMA and bearish if price resides under the average.

Given the information above. traders should look to buy the GBPCAD.

Learn Forex GBPCAD 4Hour Trend 200EMA

(Created using FXCMs Marketscope 2.0 charts)

Timing Market Entries

Once market direction is identified, we can th en use a series of EMAs to enter the market. Below we can see that a 12 and 26 period EMA have been added to the graph. Since we are only looking to buy in an uptrend, it is important to identify areas where momentum is turning back in the direction of the trend. EMAs can help us decipher this by identifying an area where our shorter period moving average crosses above the longer period EMA. At this point t raders can look to buy the market.

Below you will find several sample buy entries using EMAs on the GBPCAD. Remember, this process can be re plicated for a downtrend by selling in the event that the 12 period EMA crosses below the 26.

Learn Forex GBPCAD 4Hour Entries

(Created using FXCMs Marketscope 2.0 charts)

Exiting Positions

Now that a trade has been opened, traders need to identify when it is time to exit the market. This is the third and final step in developing a successful strategy! Traders may choose a variety of stop/limit and risk reward combinations here to suit their trading needs. However, if you are already using a series of EMAs they can be incorporated into your market exit. If we are buying on a return to bullish momentum, traders should close positions when momentum subsides. This can be found in an uptrend when price moves back and touches the 12 period EMA.

Stops should also be placed when trading with the trend. One simple methodology is to place stops under a swing high or low on the graph. This way in the event that the trend turns, any positions can be exited for a loss as quickly as possible. The graphic below will show an example of both scenarios.

Learn Forex GBPCAD EMA Exits

---Written by Walker England, Trading Instructor

To contact Walker, email WEnglandFXCM. Follow me on Twitter at WEnglandFX.

To be added to Walkers e-mail distribution list, send an email with the subject line “Distribution List” to WEnglandFXCM.

Want to learn more about Moving Averages. Take this free 14 minute “Moving Average” course presented by DailyFX Education. In the course, you will learn how to filter worthwhile trends, identify support and resistance, and find which entries give you the highest probability trades.

Register HERE to start your FOREX learning now!

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