EMA and ADX Trading Strategy

The aim of this trading strategy is to target points at which the currency pair has a potential for price reversal. This strategy uses some indicators as well as other means of strengthening the signal such as the position of the price action relative to the pivot points, or the presence of candlestick patterns that would support the direction that the currency asset is expected to assume.

So how can this strategy be prosecuted on the forex trading platform?

Time Frame: This strategy is optimized for the 1hr chart.

Indicators

1)     5EMA(close)

2)     6EMA(open)

3)     Average Directional Index or ADX (set to a value of 14)

 

Conditions for a Long Entry

The entry for this trade is made at market price. The trader should make a MARKET Buy entry when the following trade conditions are fulfilled:

1)     The 5EMA crosses the 6EMA and goes above it, while the distance between them is one pip.

2)     The value of the ADX must be > 20

 

Other supporting factors for this entry are as follows:

a)     The presence of a bullish reversal candlestick pattern such as a bullish harami or a bullish engulfing pattern.

b)     The trade conditions being fulfilled by the indicators when the price action of the currency asset is located at, or very close to a support level.

 

Exit Rules

The timing of the exit is left at the trader’s discretion. However, there are some general principles regarding trade exits that a trader can adopt when making a decision on when to exit from a profitable position. Here are some tips as to how and where to set profit targets for the purpose of trade exits:

1)     The trader can decide to exit the trade using price levels that could prove to be the nearest point of resistance. For a trade entry at S2, this could be S1, the daily pivot and the resistance points, depending on how strong the bullish move is. Generally speaking, any pivot point above the point where the trade entry was made serves as a potential resistance.

2)     It is possible that this move could be a price retracement from the existing trend. Remember that the true trend is only judged from a daily chart, but this strategy is played out on an hourly chart. While it is not generally recommended to trade against the trend, you can safely trade the pullback as long as you have a strong exit strategy that will take you out of the trade the moment the market bias resumes in favour of the original trend. Therefore, if a look at the daily chart confirms that this move is a pullback from the main trend, the 38.2% or 50% Fibonacci retracement levels should be used as exit points. If the Stochastics oscillator crosses at any of these retracement levels, exit the trade immediately.

Conditions for a Short Entry

The trader should make a MARKET Buy entry when the following occurs:

3)     The 5EMA crosses the 6EMA and goes below it, while the distance between them is one pip.

4)     The value of the ADX must be < 80.

Other supporting factors are:

c)     Bearish reversal candlestick patterns such as a bearish engulfing pattern coming into the picture when the trade conditions are met.

d)     The trade conditions being at, or very close to a resistance level.

Exit Rules

Exits also follow the same guidelines set out for the bullish entry, but in reverse. For instance, the decision to exit the trade is made using price levels that serve as support. For a trade entry at R2, this could be R1, the daily pivot or the support points, depending on the strength of the move.

If the move is a pullback from the existing trend, use the 38.2% or 50% Fibonacci retracement levels as exit points, especially if the Stochastics oscillator crosses at any of these retracement levels.

It is very important that traders master this strategy on a demo platform and fine tune it before applying it to a live account with good risk management techniques.