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“using Moving Averages For Forex Profit In The Australian Currency Landscape” – Some currency traders are very patient and like to wait for the perfect adjustment, while others need to see the movement quickly or they will abandon their positions. These impatient souls make traders perfect as they wait for the market to gain enough strength to push the currency in the desired direction, piggybacking on the momentum in hopes of expansion.
However, when the movement shows signs of losing momentum, the impatient speed trader will also be the first to jump ship. Therefore, a true momentum strategy should have strict exit rules to protect profits while allowing the expansion movement to move as much as possible. The 5-Minute Momo Strategy does exactly that.
“using Moving Averages For Forex Profit In The Australian Currency Landscape”
The five-minute momo looks for momentum or “momo” bursts on very short-term (five-minute) charts. First, traders rely on two technical indicators available with many charting software packages and platforms: the 20-period exponential moving average (EMA) and the mean convergence divergence (MACD). The EMA is chosen over simple moving averages because it places greater weight on recent movements, which are necessary for rapid movement.
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While the moving average is used to help determine the trend, the MACD histogram is used as a secondary indicator to help measure momentum. The settings for the MACD histogram are the defaults used by most charting platforms: EMA = 12, second EMA = 26, signal line EMA = 9, all using closing values.
This strategy anticipates a reversal trade, but takes advantage of a correction when momentum supports a reversal to create a larger expansion burst. The position comes in two separate segments; the first half helps us take profits and ensure we never turn a win into a loser, while the second half allows us to try to catch what could be a huge move because the stop has already been broken. Here’s how it works:
The first example above is EUR/USD on March 16, 2006, when we saw the price moving above the 20-period EMA when the MACD histogram crossed the zero line. Although there are several instances where the price tends to move above the 20-period EMA between 1:30. and 2:00 p.m. ET, at which time trading was not initiated because the MACD histogram was below the zero line.
We waited for the MACD histogram to cross the zero line, and when it did, the trade started at 1.2044. We enter with 1.2046 + 10 pips = 1.2056, with a stop of 1.2046 – 20 pips = 1.2026. Our first target is 1.2056 + 30 pips = 1.2084. It started about two and a half hours later. We exit half of the position and trace the other half with the 20 period EMA minus 15 pips. The second half finally closes at 1.2157 at 21:35. ET for a total profit in the trade of 65.5 pips.
Using Moving Averages
The next example (above) is USD/JPY on March 21, 2006, when we saw the price move above the 20-period EMA. As in the previous EUR/USD example, there were several instances where the price broke above the 20-period EMA before our entry point, but we did not take the trade because the MACD histogram was below the zero line.
The MACD turned first, so we waited for the EMA to cross 10 pips and when it did, we entered the trade at 116.67 (the EMA was 116.57).
This math is a bit more complicated. Stop is 20-EMA minus 20 pips or 116.57 – 20 pips = 116.37. The first target is entry plus risk or 116.67 + (116.67- 116.37) = 116.97. It starts in five minutes. We exit half of the position and trace the other half with the 20 period EMA minus 15 pips. The second half finally closes at 117:07 at 18:00. ET for an average profit on a trade of 35 pips. Although the profit is not as attractive as the first trade, the chart shows a clean and smooth movement, which indicates that the price action is consistent with our rules.
On the short side, our first example is NZD/USD on March 20, 2006 (shown below). We see the price cross below the 20-period EMA, but the MACD histogram is still positive, so we expect it to cross below the zero line after 25 minutes. Then our trade starts at 0.6294. As with the previous USD/JPY example, the math is a bit confusing here, as the moving average cross does not occur when the MACD crosses below the zero line, as in our first EUR/USD example. As a result, we enter with 0.6294.
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Our stop is the 20-EMA plus 20 pips. At that time the 20-EMA was 0.6301, so our entry is 0.6291 and our stop is 0.6301 + 20 pips = 0.6321. Our first target is entry cost minus or 0.6291 – (0.6321- 0.6291) = 0.6261. The goal was scored after two hours, and the second-half stoppage time was postponed. Then we trace the second half of the position along the 20-period EMA plus 15 pips. The second half then closes at 0.6262, for a total gain of 29.5 pips.
The example above is based on a GBP/USD developed opportunity on March 10, 2006. In the chart below, the price crosses below the 20-period EMA and we wait 10 minutes for the MACD histogram to move into negative territory, thereby placing our entry order at 1.7375. Based on the rules above, when the trade starts, we set the stop at 20-EMA plus 20 pips or 1.7385 + 20 = 1.7405. Our first target is entry cost minus 1.7375 – (1.7405 – 1.7375) = 1.7345. Starting soon.
Then we trace the second half of the position along the 20-period EMA plus 15 pips. The second half of the position eventually closed at 1.7268, for a total gain of 68.5 pips on the trade. In most cases, the trade was also closed when the MACD histogram fell into positive territory.
As you can see, the five-minute momo trade is a very powerful strategy for capturing momentum-based reversals. However, it doesn’t always work, and it’s important to find out where it doesn’t work and why.
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A recent example of a five-minute momo trade was EUR/CHF on March 21, 2006. As shown above, the price crosses below the 20-period EMA, and we expect the MACD histogram to move into negative territory in 20 minutes, placing an entry order at 1.5711. We set the stop at 20-EMA plus 20 pips or 1.5721 + 20 = 1.5741. Our first target is entry price minus or 1.5711 – (1.5741-1.5711) = 1.5681. The price is trading below 1.5696, which is not low enough to reach our trigger. It then continues to reverse, eventually hitting our stop, resulting in a total trade loss of 30 pips.
When using strategies based on technical indicators, it is beneficial to use a broker that offers charting platforms with the ability to automate entries, exits, stop-loss orders, and stops.
When trading the five-minute momo strategy, the most important thing to consider is whether the trading range is too tight or too wide. During quiet trading hours, when the price is hovering around the 20-EMA, the MACD histogram can reverse and generate many false signals. Alternatively, if this strategy is implemented on a currency pair with a very wide trading range, the stop may be hit before the target is triggered.
This trading strategy looks for momentum in short-term, 5-minute forex trading patterns that a market participant can take advantage of, then quickly exits when momentum begins to decline.
What Are Moving Averages
The 5-minute Momo strategy allows currency traders to take advantage of short-term changes in momentum and therefore can be employed by day traders or other short-term market players.
Scalping is the process of entering and exiting trades several times a day to make small profits. The scaling process in forex trading often involves moving in and out of currency positions for small profits. A 5 minute trading strategy can help you do this kind of trading.
The 5-Minute Momo Strategy allows traders to take short-term profits on currency pairs, while also providing the necessary exit rules to protect profits. The goal is to identify a reversal, open a position, and then rely on risk management tools, such as trailing stops, to profit from the move and not jump ship too soon. As with many systems based on technical indicators, results will vary
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