Swing Crossover Forex Trading System

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This forex trading system is a complex system which should only be used by experienced traders. Such traders must also have large account sizes on broker platforms that permit the use of micro lots in trading so that the trading account can absorb the effects of drawdowns that could possibly occur.

There is no bias as to the currency asset on which this system can be traded, but there is a bias as to the time frame on which the system can be executed: the swing crossover system is optimized for the 4 hour charts. The 4hour chart is the intermediary between the hourly charts (a favourite of short term traders) and the daily chart (which is used by long term traders).

Three indicators are used in executing this strategy. These are:

1)    21 EMA and 89SMA

2)    A colour-coded MACD histogram (available from forexoma.com). This colour-coded MACD histogram turns red during bearish movements and green during bullish movements.

3)    A custom indicator which alerts on the cross of the moving averages above.

Long Entry Rules

The trader should make a long entry when the following scenarios play out on the currency chart:

1)    The 21EMA cuts the 89SMA and goes above it.

2)    Price makes a bullish run and experiences a retracement to the 21EMA or 89SMA, while the MACD histogram is red.

3)    The Buy entry should be executed on the close of the 1st 4 hour candle after the MACD indicator has changed colour to green.

Extreme care must be taken to identify the right spot at which to execute the trade. At the time that the 1st candle that closes after the MACD colour change, the close price must be higher than the 21EMA price level. If this is not the case, it is best to wait until the next long entry signal sets up correctly.

To reprise this, the price should first climb, then retrace with the colour of the MACD indicator changing from green to red, followed by another round of price bullishness with the MACD indicator changing from red to green. At the same time, the 21EMA must have crossed above the 89SMA.

Exit Rules for Long Entry

  • Stops are placed tightly to militate against excessive losses, and should be placed 10 pips below the lowest point of the previous move. This depends on the currency asset being traded and this low point can best be detected using a daily chart.
  • The risk – reward ratio for this trade is 1:1, therefore the profit target should be placed at an equidistant point to the stop-loss.

Short Entry Rules

The trader should enter short when the following occur:

4)    The 21EMA cuts the 89SMA and moves below it.

5)    Price action heads lower followed by a retracement to the 21EMA or 89SMA, while the MACD histogram is green.

6)    The sell entry should be executed on the close of the 1st 4 hour candle after the MACD indicator has changed colour from green to red.

Just like in the long trade, the trader should watch out and make sure that the close price must be lower than the 21EMA price level 1st candle that closes after the MACD colour change. If this is not the case, it is best to wait until the next short entry sets up properly.

Exit Rules for Short Entry

  • Stops should be placed 10 pips above the price action high of the previous move. This depends on the currency asset being traded and is best detected with a daily chart.
  • The risk – reward ratio for this trade is 1:1, therefore the profit target should be equidistant to the stop-loss.

The chart above illustrates buy and sell situations. We can clearly see the buy point (circle above the red line on the left), with the corresponding colour change, and the sell point on the right, with the corresponding colour change. The red lines represent where the trader should set his stop loss for both buy and sell trades.

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