Exponential Moving Average Strategy
Exponential Moving Average Strategy
EMA stands for Exponential Moving Average, if you’re not familiar with technical analysis, you will see what looks like a wavy line loosely following (and often predicting) price movement. Generally speaking the EMA is a very simple forex trading strategy. However, there are multiple moving averages, and choosing which to use is where a lot of people fall down.
As always, there is no guarantees with any trading strategy, and so make sure you never risk more than you can afford to lose, and also demo until you are truly comfortable with the strategy.
This strategy is based on Rob Bookers 5-13-62 strategy. If you would like to read more about Rob Booker, he has some incredible books detailing some very important aspects of trading, such as mindset, but he also has a whole load more strategies. You can view some of his works HERE.
Setting Up Your Charts For The Exponential Moving Average Strategy
The different EMA’s are based on the past activity of price. For example the 5 EMA represents the past 5 periods (which on a 30 min time frame would be the last 5 30 minute periods) and the 13 represents 13 periods and so on.
The 62 is the most commonly used, as it is the closest to the Fibonacci level 61.8 (you don’t need to worry about this right now, Fibs is a lesson for another day)
When certain exponential moving averages cross, it can be indicative of a change in trend. This is where our strategy comes into play.
This simple strategy uses three EMAs on the same currency pair, for example, take the GBP/USD and place on that chart the 5, 13 and 62 EMA. It can be used on any time frame, as long as you are aware of that the shorter time frame you use, the shorter the trade will be. For example if you were to do this on a 5 minute chart, it would be a much shorter trade (and less pips) than on a 30 minute chart.
It also tends to perform better on time frames that have clear price fluctuations, on the smaller time frames there is a lot of ‘micro movements’ and you would be in and out of the trades very quickly, with this in mind, by the time you pay any broker spreads/commissions, it may not be worth your time!
I personally like to focus on the 30 minute chart.
I personally use Trading View for my charts. It has a free plan, but the paid features are incredible. It also has thousands of pre-programmed indicators you can use in the library for free.
To get an EMA on a Trading View chart simply go to indicators at the top, then when the search box comes up type EMA into it, and you will see an indicator named moving average exponential, this is the indicator you want to add to your chart.
Once added you will need to alter the settings. To do this, head on up to the little symbol (which will be a plus or a minus depending on if you have your indicator list open) that appears next to the currency pair on the top left of the chart. Click it, and it will bring up your list of current indicators on your chart. In this example you will see two EMA’s appear. Each of them has a very small cog icon next to it, which is almost transparent in colour so quite difficult to see on this image, but once you click the cog, you will get the inputs box pop up.
The length is where you input the EMA number you are wanting to display i.e. 5, 13 and 62 in our case, Click ok, then repeat the process for the other EMA’s you require.
If you are using MT4 (which comes free with most Brokers) instead of Trading View
You simply go to insert at the top menu, then indicators, trend, moving average. Then when the pop up box comes up, select your period, and change the MA method to exponential.
I also always colour my exponential moving average lines in a certain way across all charts, so they are instantly recognisable.
I use a light blue thick line for the 62.
A gold or yellow medium thickness line for the 13.
And A think, dark blue line for the 5.
Exponential Moving Average Strategy Guidelines
The Exponential Moving Averages strategy, is based on varying crosses of the lines, to tell us when there may be a change of trend.
You begin looking for a certain criteria amongst the moving averages.
For a buy position (Long) you are looking for:
The 62 should be the highest exponential moving average on the chart
The 13 should be the middle exponential moving average on the chart
The 5 should be the lowest exponential moving average on the chart
For a sell position (Short) you are looking for:
The 5 should be the highest exponential moving average on the chart
The 13 should be the middle exponential moving average on the chart
The 62 should be the lowest exponential moving average on the chart
From here you are basically waiting on some crossovers to happen.
When the 5 crosses the 13, it tells you it is time to keep an eye on this pair. (You can set an alert for this on both Trading View and MT4 so you don’t have to sit at your PC day and night)
Once this has occurred, you then wait for the 13 to cross the 62. When the candle this occurred on closes, you can enter the trade.
To break this down:
Entering A Buy (Long)
The EMAs are ordered as 62 highest, 13 middle, and 5 lowest.
When the 5 crosses up above the 13, it’s time to watch the trade.
When the 13 crosses above the 62, wait for the candle close.
Once the candle closes enter the trade.
Entering A Sell (Short)
The EMAs are ordered 5 highest, 13 middle, and 62 lowest.
When the 5 crosses down below the 13, it’s time to watch the trade.
When the 13 crosses below the 62, wait for the candle close.
Once the candle closes enter the trade.
For Example:
It is important that you do not enter a 13/62 crossover trade, unless you have previously had the 5 / 13 exponential moving average crossover.
You also need to be aware that price does move in waves, and if you got into a trade on a candle close after a particularly impulsive move, you could experience a pullback which would result in drawdown before the trade starts to go in your direction. With this in mind, I would consider always ensuring you check the Economic Calendar before trading this strategy, and avoid any high impact news, and also ensure you have good stop losses set as well.
Exiting The Exponential Moving Average Trade
Money management is traders choice when it comes to trading, for example, you may choose a pip goal based on your long term trading plan, use the hull moving average as your exit, or some other exit strategy, but some strategies, such as this one, come with their very own exit criteria which you can opt to use should you wish.
The exit for the exponential moving average strategy is common sense really, if you enter a buy trade for example and you see the sell trade setting up (i.e the 5 has crossed down over the 13) the it is time to exit your buy. The nice thing here is that, once you see that, you can sit and wait for the sell trade to stack up and enter a short position. As with the entry you should not close the position until the candle has closed. This will stop you closing trades that are simply ‘fluctuating’ rather than reversing.
You could also opt to identify potential support and resistance zones, and exit at that point.
These trades happen multiple times per day and so you are never short of trade opportunities, and in my experience have a very high success rate.
Risk Management in the Exponential Moving Average Strategy
No trade works 100% of the time, Sometimes I crossover will actually be a ‘false indicator’ due to a micro movement and with this in mind we have to protect ourselves from a losing trade scenario.
This means setting a good stop loss.
There is no hard and fast rule with where to set your stop loss for this strategy, as it again varies from trader to trader, however, my personal preference is to place my stop loss at the last swing high / swing low that happened before the 5/13 crossover. If this is a genuine reversal, then price should not reach that point again, until the new trend has completed and price has decided to return there.
You can also set a number stop loss, on a 30 minute chart, I find 20 pips to be suitable, but this will need testing / adjusting on different time frames.
If you want to make your entry more precise, you can use other tools such as RSI to help you get the perfect entry, if you do this, you may then be able to reduce your stop loss even further.
That’s All Folks
I hope this guide to the exponential moving average has been useful to you. It is a very well established strategy with a high success rate, and with some practice you should be able to master the art of it no problem.