Exponential Moving Average Cross Strategy

Introduction

This is an intraday trading strategy which will involve two moving averages as well as the conventional MACD indicator which is found on the MT4 platform. The strategy is traded on the hourly charts and can be used as a form of small scale scalping strategy with a clear focus. This should be thoroughly practiced on a demo platform before being deployed on a live account.

Indicators
The indicators used for this strategy are:

  1. 5-day Exponential Moving Average (5 EMA) which we shall set to a yellow colour.
  2. 15-day Simple Moving Average (15 SMA), set to a blue colour.
  3. Default MACD indicator.

All indicators are used with their default settings, but you may adjust the colours so that you get the best visualization possible.

The Strategy

The strategy tries to target periods when the MACD bars are either being supported by the red line along with a cross of the short exponential moving average over the long simple moving average, and a reverse situation as well for a short trade.

The strategy is best used on the 1 hour charts, making it wholly suitable for intraday trading. Furthermore, the MACD signal that is used for this trade is the location of the bars of the MACD indicator relative to the MACD signal line (the red dotted line in the MACD indicator window). If the MACD bars are located above the MACD signal line, this would be bullish for the currency pair. If the bars of the MACD are located below the signal line, this is bearish. Both signals are taken irrespective of whether the MACD indicator itself is in positive or negative area.

This trade targets very small profits; in the range of 25 pips to 40 pips.

1) Long Trade

For the long trade, we wait for the 5-day EMA to cross above the 15-day SMA so that it is now located above the 15-day EMA. Next, check if the bars of the MACD indicator have move above the MACD signal line at the same time that the moving average cross has occurred. If this is the case, then place a long trade at the open of the next candle.

Let us now use charts to demonstrate this strategy.

emacross_long

This chart throws up two trade opportunities. We see the 5EMA crossing above the 15EMA and at the same time, the MACD bars are above the red line; almost like they are standing on the red line itself. The grid line tool can be used to ensure that both the moving average and MACD signals are occurring at the same time before the trigger is pulled.

Stop Loss

The stop loss for the trade is set at a few pips below the crossing point of the moving average indicators. This should be as tight as possible and should not be adjusted to accommodate retreating prices.

Take Profit

The Take Profit point could be set to where the MACD bars start to change their orientation to the red signal line. For instance, if the MACD bars start to retreat under the red signal line, this should be a clear signal to check out of the trade. Other means of determining market reversals can be used as markers for trade exit.

2) Short Trade

In the short trade setup, we look for where the 5-day EMA crosses below the 15-day SMA and at the same time, check that the bars of the MACD indicator are below the red signal line signal.

emacross_short

The chart here displays three trade opportunities. Note that the bars of the MACD were as it were, being resisted by the red signal line while the 5-day EMA was crossing below the 15-day SMA. Again notice that these are short term moves which only last a few hours, so traders should be very vigilant to set correct trade entries and to exit the trades at the right time.

Stop Loss

The stop loss for the short trade should be set above the cross point of the two moving averages. This should be as tight as possible, considering the fact that the profit targets are not much.

Take Profit

The Take Profit for the short trade is dynamic and several parameters can be used to take profits. Remember that the profits being sought are not much and therefore vigilance is required.

A good method of taking profits here is to watch out for when the MACD bars start to change their position in relationship to the red signal line. Other reversal information on the chart itself can be considered.

Precautions

It must be remembered that the trade entries are only made when the new candle opens. Also, stops should be as tight as possible. The grid lines on the MT4 chart should be deployed to make sure that the MACD and moving average signals are in tandem with each other.

Leave a Reply