Momentum Crossover Forex Trading Strategy

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Momentum Crossover Forex Trading Strategy 1

Traders often look for exciting trading strategies that allow them to take multiple trades in any given day. Although it is the excitement of making money that draws many people to trading, it is exactly this kind of behavior that prevents them from profiting from the forex markets. If it is excitement that you are looking for, then better go to a casino. But if it is making profits that makes you interested, than the Momentum Crossover Forex Trading Strategy might just be for you.

The Momentum Crossover Forex Trading Strategy is a trend following strategy that provides traders with good trade entries coming from momentum reversals. These momentum reversals allow traders to enter the market as soon as the new trend is confirmed.

Moving Average Crossovers

Moving Average Crossovers are one of the most basic types of trading strategies. It is a simple strategy that could easily be followed by any trader, whether a seasoned veteran or a rookie trader.

To trade moving average crossovers, traders use two moving averages with different parameters. It could vary depending on the type of moving average being, the number of periods covered by the moving averages or any other modifications. The key is to find the right pairing of moving averages which allows traders to identify possible trend reversal points. One of the moving averages should represent a shorter-term or a faster moving average, while the other moving average should be somewhat slower than the first. As trends reverse, these moving averages also tend to crossover due to the shifting of the direction of price.

Some traders may think that crossover strategies are too basic and lack excitement. Some traders overlook crossover trend reversal strategies because of its simplicity. However, trading success is not based on the complexity of the plan but on the potential of the plan to yield huge profits. Crossover strategies might be simple, but with the right setup, crossover strategies are able to produce trades that yield high profits.

Yang Trader Indicator

The Yang Trader indicator is a custom indicator which has many uses for different traders. This indicator is mainly intended to be used by mean reversion traders but could also be very useful for momentum traders.

The Yang Trader is an oscillating indicator which draws a line that is characteristically very smooth. It has an oversold marker at 15 and an overbought marker at 80. Price is considered to be reverting from an oversold position back to the mean when the Yang Trader line crosses above 15. Conversely, whenever the Yang Trader line crosses below 80, price is considered to be reversing from an overbought condition.

Momentum traders on the other hand, use the Yang Trader indicator differently. Instead of trading on the overbought and oversold mean reversal, they would wait for the Yang Trader line to cross over the midline, which is 50. This could be considered more of a trend reversal rather than a temporary mean reversal and usually occurs whenever the momentum of price is shifting to the opposite direction. A crossover above 50 is considered a bullish trend reversal, while a crossover below it is considered a bearish trend reversal.

Trading Strategy

This trend reversal strategy is based on the confluence of a very responsive crossover trade setup and the trend reversal signal of the Yang Trader custom indicator.

For the crossover strategy, we will be using the XMA indicator and the 24-period Exponential Moving Average (EMA). The XMA is a modified moving average that helps traders avoid false entries during choppy market conditions, yet it is also very responsive to short-term trend changes. The XMA will be used to represent the shorter-term trend. The 24 EMA will be representing the longer-term trend.

As for the Yang Trader indicator, we will be looking for its line to crossover 50 in the direction of the crossover. This would indicate that the crossover signal is in confluence with the shifting of momentum based on the Yang Trader indicator.

Indicators:

  • Xma
  • 24-period Exponential Moving Average (gold)
  • YangTrader

Timeframe: preferably 1-hour, 4-hour and daily charts

Currency Pairs: major and minor pairs

Trading Session: Tokyo, London and New York

Buy Trade Setup

Entry

  • The Yang Trader indicator line should cross above 50 indicating a bullish trend reversal
  • The blue line of the XMA indicator should cross above the gold line of the 24 EMA indicating a bullish trend reversal
  • These bullish trend reversal signals should be somewhat aligned
  • Enter a buy order on the confluence of the above conditions

Stop Loss

  • Set the stop loss on the support level below the entry candle

Exit

  • Close the trade as soon as price closes below the gold line of the 24 EMA
  • Close the trade as soon as the Yang Trader line crosses below 50

Momentum Crossover Forex Trading Strategy 1

Momentum Crossover Forex Trading Strategy 2

Sell Trade Setup

Entry

  • The Yang Trader indicator line should cross below 50 indicating a bearihs trend reversal
  • The blue line of the XMA indicator should cross below the gold line of the 24 EMA indicating a bearish trend reversal
  • These bearish trend reversal signals should be somewhat aligned
  • Enter a sell order on the confluence of the above conditions

Stop Loss

  • Set the stop loss on the resistance level above the entry candle

Exit

  • Close the trade as soon as price closes above the gold line of the 24 EMA
  • Close the trade as soon as the Yang Trader line crosses above 50

Momentum Crossover Forex Trading Strategy 3

Momentum Crossover Forex Trading Strategy 4

Conclusion

This strategy works best on trending market conditions. It is best to use this type of strategy on markets which have a strong tendency to trend.

This strategy may have some drawdowns whenever it is used in a ranging market environment, which is normal for any trend following type of strategy. However, the high reward-risk ratio compensates for such losses. It is not uncommon to see trades that could return as much as 3:1 reward-risk ratio using this strategy.

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