The forex market, by its very nature, is unpredictable. It is probably one of the most volatile markets in trading. Price could move by so much pips in an hour and could change directions several times in a day. It is traded by so many traders who have different opinions and sentiments and traded for several utilitarian reasons other than speculating to gain profits. These reasons and many more make the forex market very unpredictable. However, in spite of this seemingly chaotic unpredictability, there is a somewhat predictable rhythm to how the forex markets move. Of course, it could not be predicted with 100% certainty, but there are ways to logically predict the forex market. These techniques help traders understand what the market is doing and allow traders to anticipate market movements with a high degree of probability.
Moving Averages
One of the most popular ways to anticipate market movements and trends is with the use of moving averages. Most traders use a moving average or a modified variation of it on their charts. Most indicators also make use of moving averages, are derived from moving averages, or are a modified version of a moving average. This makes the moving average, even with its simplicity, a staple technical indicator for traders aiming to make money out of the forex market.
One of the more popular ways to use the moving average in a trading strategy is by taking the crossovers of moving averages as a trend reversal signal. This type of strategy is more popularly known as a crossover strategy. It is a trend following or a trend reversal type of strategy, which aims to provide profitable trade entries whenever the trend is showing signs of reversing.
Crossover strategies might sound like a simplistic strategy used only be beginners, but it is very logical. It follows price movements and momentum, which helps predict possible trend reversals. Although it is not a 100% correct every time it produces an entry signal, it does well in providing trade setups that could produce huge profits.
EMA Angle Zero
The EMA Angle Zero indicator is a custom indicator which helps traders identify trend direction and momentum.
It is an oscillating indicator which prints histogram bars based on the angle of a moving average. This is done by doubling a moving average and shifting one for a few periods. One moving average is then subtracted to the other. The difference between the two moving averages is what is considered as the angle or the slope of the moving average. This indicator also filters out non-trending markets by marking histogram bars that do not have enough angle to warrant a strong trend. Strong bullish histograms are colored lime green, strong bearish histograms are colored yellow, while non-trending histograms are colored fire brick.
Trading Strategy
This strategy produces trade signals based on the crossover of the EMA Predictive indicator, which is a modified moving average, and a 14-period Exponential Moving Average (EMA). The EMA Predictive indicator provides a smoothened type of moving average, which still remains very responsive as a short- to mid-term moving average. The crossover of the two moving averages works well in predicting such trends. These moving average settings also do not produce too much false signals or provide premature reversal signals too often. This moving average settings works well in predicting mid-term trends, which at times could last very long.
This crossover strategy is then combined with the EMA Angle Zero trend reversal signals. The crossover of the two moving averages is complementary to the signals of the EMA Angle Zero. If you would observe the two moving averages with the EMA Angle Zero indicator, you would notice how they seem to produce signals that result in strong trends whenever they are in confluence. For this reason, we would be trading crossover signals that are in confluence with the EMA Angle Zero indicator.
Indicators:
- EMAPredictive2
- Long Period: 50.0
- Short Period: 16.0
- EMAAngleZero
- EMA Period: 50
- 14-period Exponential Moving Average
Timeframe: 1-hour, 4-hour and daily charts
Currency Pairs: major and minor pairs
Trading Session: Tokyo, London and New York sessions
Buy Trade Setup
Entry
- The red line of the EMA Predictive indicator should cross above the blue line of the 14 EMA indicating a bullish trend reversal
- The EMA Angle Zero indicator’s histograms should cross above zero and print a lime green histogram 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 the EMA Angle Zero indicator’s histograms changes color
Sell Trade Setup
Entry
- The red line of the EMA Predictive indicator should cross below the blue line of the 14 EMA indicating a bearish trend reversal
- The EMA Angle Zero indicator’s histograms should cross below zero and print a yellow histogram 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 the EMA Angle Zero indicator’s histograms changes color
Conclusion
This strategy is a high yield type of trading strategy. It allows traders to take trades with tight stop losses and hold on to a trade that could yield several times more than the risk on the stop loss. There are also many instances when trades could be held very long since some of the trade setups that this strategy produces could result in a strong trend.
This strategy works best when used in a market that has a strong tendency to trend. Choppy market conditions are not ideal for this strategy, however when used in a market that trends long, this strategy excels as many of the trades would result in huge gains that could add huge profits to a trading account.
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