Double EMA Channel Forex Trading System

Introduction to the Double EMA Channel Forex Trading System

The forex strategy described is a trend following strategy designed to allow traders to follow an existing trend. This strategy is known as the double EMA channel trading strategy, basically because it uses two exponential moving averages to track the movement of the trend, from where traders can get in to profit from that trend.

Trades are taken on all currency pairs, and any time frame can be used. Higher time frames usually give more rewards in terms of number of pips that can potentially be made, so it is advised that as much as possible, higher time frames are used for this strategy. Furthermore, trends are better defined on higher time frames.

Indicators Used:

The indicators for this strategy are as follows:

  1. 60-period exponential moving average applied to highs.
  2. 60-period exponential moving average applied to lows.
  3. 240-period exponential moving average applied to lows.
  4. 240-period exponential moving average applied to highs.

Please note where the moving averages are applied and make the necessary changes in the indicator window. The exponential moving average indicator is found in the MT4 as a native indicator.

The Strategy
The strategy is a trend-following strategy. We are looking at two things:

  1. The 60-period moving averages must either be above the 240-period moving averages (long trade) or located below the 240-period moving averages (short trade). It makes it easier to view both 60-period MAs as one single tunnel, and the 240-period MAs as another tunnel.
  2. We also want both sets of moving averages angling towards the intended trade directions, since the direction that they point to is the direction of the trend. In other words, all four moving averages must point to the trend and therefore the trade direction.
  3. In some cases, only one of the 60-period moving averages can be above the 240-period moving averages for a long trade, or below the 240-period moving averages for the short trade.

Once you have these in place, it is time to go to the trades.

1) Long Trade
The Long trade setup occurs when:

  1. The 60-period EMA tunnel is above the 240-period EMA tunnel, or at least one of the 60-EMA lines is above the 240-EMA tunnel. The previous situation is preferable.
  2. At the same time, the price action candlesticks moves into the 60-period EMA tunnel.
  3. Then price breaks out of the upper 60-period EMA line (i.e. breaks the 60-EMA tunnel upwards).
  4. Allow for a brief pullback to broken 60-period EMA line, then go long at the open of the next candle.

The long trade is then executed at the next candlestick’s opening price. We demonstrate this trade setup in the snapshot below:

ema_channel_long

The snapshot shows the setup for this trade. The entry point is shown.

Stop Loss

The stop loss is set at a few pips below the 60EMA red tunnel, i.e. below the lower of the two EMA lines. If you look closely at the charts, you will notice that a few candles after the long entry, price action tried to go below the red tunnel but was prevented from doing so by the lower of the two 60EMA lines. This shows the importance of setting the stop loss as described.

Take Profit

The Take Profit is dynamic and cannot be set at trade entry. The Take Profit is the area where the Stochastics histogram bars are so high that they are virtually in the normal overbought territory that the regular Stochastics indicator would have been at that time. Once price gets to this area, the trader should then take profit. This trade was taken on the 4hr chart of the GBPUSD and would have yielded 100 pips.

Short Trade
The trader should go short on the asset when the following setup occurs:

  1. The 60-period EMA tunnel is below the 240-period EMA tunnel, or at least one of the 60-EMA lines is below the 240-EMA tunnel. The previous situation is preferable.
  2. At the same time, the price action candlestick moves into the 60-period EMA tunnel.
  3. Then price breaks out of the lower 60-period EMA line (i.e. breaks the 60-EMA tunnel downwards).
  4. Allow for a brief pullback to the broken 60-period EMA line, then go short at the open of the next candle.

The short trade is then executed at the next candlestick’s opening price. We demonstrate this trade setup in the snapshot below:

EMA_channel_short

The snapshot shows the two EMA tunnels, and the price entry point. Notice that price first broke the lower 60-period EMA line, then attempted an upside pullback. This is where the short entry is initiated.

Stop Loss

The stop loss is set to a few pips above the upper 60EMA line, i.e. above the red tunnel.

Take Profit

The Take Profit level is set at the trader’s discretion, using some of the principles we have talked about in previous articles.

Conclusion

This strategy performs very well in a trending market, and less so in a range-bound market. Therefore, trades should be made as much as possible on higher time frames when it is sure that the market is trending.

This strategy should be thoroughly practiced on a demo account before being applied to a live account. The indicators are found on the MT4 trend indicator class.

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