Are you a relatively new trader looking for a solid forex strategy?
A challenge facing many new traders when developing their forex strategy is the ability to identify the overall trend for intra-day trading.
The 200 EMA (Exponential Moving Average) can solve the problem.
The 200 EMA is one of the most popular indicators of all time with Forex traders the world over, and for that reason alone is worth noting due to the psychological effect on the market place price can have when hovering around the 200 EMA.
How To Use The 200 EMA
Start using this effective Forex strategy by setting up charts on three different time frames:
A 4 hour chart
A 1 hour chart
15 minute
Now add the 200 EMA indicator to each chart for the 3 time frames. You could color it red or whatever you prefer to make it stand out.
One suggestion is to use the vertical tile feature and have the 3 charts vertically side by side so you can easily eyeball the position of price relative to the 200 EMA. The candles may appear a little distorted but that really doesn't affect your strategy.
Now scroll through the various currency pairs you like to trade.
If you prefer to trade only pairs with a smaller pip spread, they amount to about 9.
Here they are:
EUR/USD | GBP/USD | USD/CHF | USD/JPY | EUR/JPY | USD/CAD | AUD/USD | NZD/USD | EUR/CHF
What you are looking for is any currency pair that bucks the 200 EMA on the 15 minute chart.
So for example, look at the EUR/USD pair and note the position of price relative to the 200 EMA on the 3 time frames.
If price is well above the 200 EMA on the 4 hour chart, well above the 200 EMA on the 1 hour chart, but BELOW the 200 EMA on the 15 minute chart, price is bucking the trend.
So the main trend is going up while price is now in retracement, temporarily going against the overall trend.
You now need to look for a good entry point to get into the market in line with the basic principle of buying the dips in an up trend while selling the rallies in a down trend.
In the example given above you would look for an opportunity to buy the EUR/USD, perhaps watching for a candle signal that price has exhausted it's downward momentum, bucking the 15 minute chart 200 EMA and will soon resume it's upward momentum.
This simple exercise only takes a few minutes and can be done a few times during the day.
Look Out For Price Going Against The Trend
Sit up, take note, when you see price going beyond the 200 EMA on the smaller time frame, the 15 minute chart, while on the larger time frames, 4 hour and 1 hour, it is well beyond the 200 EMA in the opposite direction. Seize the change to make a high probability trade and bank some profits.
See for yourself how effective this simple Forex strategy is. Practice it for a short time and then, once convinced, add it to your Forex trading tool kit.
By Michael Jones