Modified MA Forex Strategy

Introduction

The modified moving average strategy combines a short moving average with a long term moving average and also aims to confirm the momentum of the trading signal by combining this with a MACD indicator which has an in-built colour change to reflect the bias of the currency pair.

Indicators
Three indicators are used for this strategy:

  1. A 50-day exponential moving average indicator, which we shall give a red colour for the purpose of this illustration.
  2. A 110-day exponential moving average indicator, which shall be coloured blue for this article’s lesson.
  3. A colour-coded MACD indicator, which can be downloaded from the MQL4 community using this link.

The Strategy

As with most moving average strategies, the aim of this strategy is to detect a trend change as well as gauge the momentum of the trend change.

There is basically just one rule for this trade strategy, and that is that the currency pair must be trending. This strategy will not work in a range-bound market. So you must ensure that the price of the currency pair is either trending downwards or trending upwards. Usually the direction of the moving averages will indicate where the trend of the asset is headed.

For our trade signals, we will be looking for an opportunity when the MACD histogram will change colour at the same time that the price bounces off the moving averages in the direction of the trend, or when the 50 EMA crosses the 110 EMA in the direction of the trend.

The strategy can be traded on the 1 hour, 4 hour and daily charts. It is preferable to use the strategy on the 4-hour and daily charts because successful setups on those time frames deliver more pips per trade than what is obtainable on the hourly chart.

1) Long Trade

These are the rules for entry when the signals point to an upward price movement.

a) The old method of trading the long entry was to wait for the 50 EMA to cross above the 110 EMA. However, personal experience with this strategy has shown that this leads to many lost opportunities. Therefore, it is now more practical to allow the 50EMA to have crossed the 110 EMA so that the uptrend would have been clearly defined.

b) The price action retraces mildly and bounces off the 50 EMA.
c) The MACD histogram is blue in colour.

The trade is then taken on the bounce of the price action on the 50EMA, either using a Market Buy order if the trader is able to monitor the charts, or using a Buy Limit order if the trader will not be around to track the entry.

The snapshot below demonstrates what we are talking about:

Modified_MA1

Here we see the 50 EMA above the 110 EMA with the price bouncing off with several candles off the 50EMA line. Eventually, the trade moved off to record about 484 pips, even though it stuttered a lot along the way.

Stop Loss

Set the stop loss at a few pips below the 100EMA line, which is acting as a strong support for this trade.

Take Profit

Take profits from this trade when the MACD changes colour to red. This is clearly shown on the chart.

2) Short Trade

For the short trade, we are looking for the following entry parameters:

a) 50 EMA is below the 110 EMA in a market which is trend downwards.
b) Price attempts to retrace up but is rejected at the 50 EMA line.
c) MACD is red in colour.

The trade is therefore made using a Market Sell if the trader will be around to monitor the exact entry position, or a Sell Limit order can be used with entry price marked at the region of the 50 EMA line.

The snapshot below tells the story:

Modified_MA2

Here we can see two trade setups on the chart, along with the entry and exit parameters. Now this trade setup may look like it is all a joke, but with this trade pulled off a daily chart, take a look at the enormous profits that would have been made in a space of three weeks: a combined total of almost 2,200 pips.

Clearly, this is a strategy that those who love the slow and steady approach to profits should be adopting.

Stop Loss

The 110 EMA is the key support-resistance instrument for this trade. The stop loss for the short trade should therefore be set above the 110 EMA. Sometimes, the price action continues to move above the 50EMA (see the 2nd entry in the snapshot above), but it will never cross above the 110EMA mark. If it does, then the trend has changed and the stop loss should save you from losses.

Take Profit

The profit target should be set according to the colour change of the MACD histogram. In this case, if it turns blue, exit the trade.

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