The trading strategy that we present below is a system based on the crossover of 4 exponential moving averages (EMA) of 5, 10, 20 and 50 periods. In this sense, it is no different from other similar strategies, but includes indicators such as the RSI and stochastic oscillator to measure market momentum, which allows the trader to confirm the reliability of the crosses. We should recall that in trading systems based on moving averages crossies false signals may occur and therefore it is important to employ means for filtering signals.This system also includes a custom indicator for Metatrader 4 (EMA/EMA Cross Indicator) which serves to signal EMA crossings.
The system and its rules are quite simple as discussed below. As always we recommend trying the strategy on a demo account before risking real money.
Indicators and system settings
- A candlestick chart in any time frame.
- It is recommended for any currency pair, although its effectiveness has not been evaluated in different pairs.
- Its use is not recommended several minutes before the publication of important news.
- 5-period EMA.
- 10-period EMA.
- 20-period EMA
- 50-periodo EMA
- Stochastic Oscillator (5. 3, 3).
- RSI (14).
- Zig Zag indicator (12, 5, 3).
- Custom indicator EMA/EMA Cross Indicator (it is not required to implement the system).
EMA Trading System rules
Rules for opening long positions
The entry is defined by the following conditions:
- A green arrow by the EMA/EMA Cross Indicator that signals a bullish cross of the 4 EMA that can serve as entry signal to open a buy position. (Entry recommendation).
- A candle closes above the 5-period EMA after the entry signal (green arrow) appears. This means a confirmation of the buy signal.
- The stochastic oscillator is in upward direction (confirmation signal). The signal has more strength if the stochastic oscillator is above 50 but not in overbought zone.
- The RSI is in bullish direction (confirmation signal). The signal has more strength if the RSI is above 50 but not in overbought zone.
The position exit is defined by the following conditions:
- A red arrow of the EMA/EMA Cross Indicator shows a bearish cross of moving averages, indicating a possible trend change. (Exit Recommendation)
- A candle closes below the 20-period EMA. (Exit confirmation).
Rules for opening short positions
The entry is defined by the following conditions:
- A red arrow by the EMA/EMA Cross Indicator that signals a bearish cross of the 4 EMA that can serve as entry signal to open a short position. (Entry recommendation).
- A candle closes below the 5-period EMA after the entry signal (red arrow) appears. This means a confirmation of the sale signal.
- The stochastic oscillator is in downward direction (confirmation signal). The signal has more strength if the stochastic oscillator is below 50 but not in oversold zone.
- The RSI is in bearish direction (confirmation signal). The signal has more strength if the RSI is below 50 but not in oversold zone.
The position exit is defined by the following conditions:
- A green arrow of the EMA/EMA Cross Indicator shows a bullish cross of moving averages, indicating a possible trend change. (Exit Recommendation)
- A candle closes above the 20-period EMA. (Exit confirmation).
For both signals, the change in direction of the Zig Zag indicator may also signal a possible trend change and can be taken as a signal for closing a position.
Trading system example
As we have seen, the system is really simple. Several confirmation signals are added in the form of momentum indicators such as RSI and stochastic oscillator to avoid false signals so common in those systems based on moving averages crossing.
In the picture above we see the example of a buy signal generated by the system. In this case, first appears a green arrow pointing to the EMA crossing which suggest the opening of a long position. At the same time, both the RSI and stochastic oscillator are in bullish direction. The signal is confirmed when a candle closes above the 5-period EMA. As we see, the price begins to rise strongly until it reaches a Fibonacci level, and goes back to the 50-period EMA where it reprises the upward movement.
We could have closed the position at that level. However, if the position had not been closed, you can consider closing the position when a red arrow appears, since this is a signal of a possible change from bullish to bearish trend. Finally, when a candle closes below the 20-period EMA the long position is closed since the change of market direction is clear.
System template for Metatrader 4
Most indicators used by this system can be found in any trading platform. However, since it makes use of the custom indicator EMA/EMA Cross Indicator for Metatrader 4 to indicate the times when EMA crossings occur, we have included a template with the indicator for download. The template file (Cruce-4EMA.tpl) must be copied to the Templates folder of Metatrader 4 while the two files of the custom indicator should be added to the MQL4> Indicators folder.
-Link to download template and trading system indicators
Through the following link you can access a complete list of trading strategies: Forex Trading Systems
