Keep it simple…
Many traders are led to believe that a complex trading strategy is the key to winning the forex market game. However, it does not always follow that complex strategies would lead to better gains. Sometimes simplicity is the way to go. Simple trading strategies are easier to follow and allows for more trades, making it a lot more suitable for new traders.
Crossover strategies are some of the simplest types of trading strategies. It is a trend reversal strategy that identifies possible fresh trends based on the crossing over of moving averages. Traders can easily identify possible trend reversals using the crossover of moving averages as a basis.
Although crossover strategies can still be very effective, it has still fallen out of fashion. This is probably because many traders who blindly follow signals produced by crossover strategies have experienced successive losses. Even though crossover strategies are viable trading strategies, it should not be followed blindly. There are cases wherein the market could fake out a trader into a trade only to reverse again. This is called a whipsaw. These scenarios are very common in a choppy market condition.
One way to avoid being faked-out by crossover strategies is by waiting for a price action confirmation. This means allowing price action to retest the prior area of support or resistance. Many traders manually plot a support or resistance line. However, traders could also use the moving average lines since these lines act as a dynamic support or resistance.
Reduced Lag MA Crossover Forex Trading Strategy is a crossover strategy which makes use of such price action confirmation.
Reduced Lag MA
Reduced Lag MA is a technical indicator based on the concept of moving average crossovers. However, instead of using regular moving averages, it makes use of a modified moving average. The moving average lines that the Reduced Lag MA indicator plots is characteristically very smooth. Price action also tends to respect the lines plotted by this indicator as a dynamic support or resistance line.
This indicator plots two moving average lines. The faster line is a red moving average line, while the slower line is a blue moving average line.
Trend direction is simply based on how these two lines are stacked. If the red line is above the blue line, the trend is bullish. If the blue line is above the red line, then the trend is bearish.
Trend reversal signals could also be spotted based on the crossing over of the two moving average lines.
Relative Strength Index
Relative Strength Index (RSI) is a technical indicator which is part of the oscillator family of indicators. It is also a momentum indicator which measures the magnitude of recent price changes by comparing it to prior historical price changes. This information could then be used to help traders identify direction bias, trends, momentum and overbought or oversold conditions.
The RSI plots a line that could oscillate from 0 to 100. It also typically has markers at level 30, 50 and 70.
The 50 mark is usually used to identify directional bias. The market is bullish if the RSI line is above 50, and bearish if the RSI line is below 50.
Levels 30 and 70 are mainly used to identify oversold or overbought markets. An RSI line below 30 indicates an oversold market, while an RSI line above 70 indicates an overbought market. However, momentum traders see it differently. An RSI line crossing above 70 could indicate a bullish momentum, while an RSI line dropping below 30 could indicate a bearish momentum.
Some traders also add levels 45 and 55 to help them identify trending markets. Price would typically stay above 50 during an uptrend, with level 45 as a support. On the other hand, price would usually stay below 50 during a downtrend, with level 55 as a resistance.
Trading Strategy
This trading strategy is a simple crossover trading strategy which makes use of the Reduced Lag MA indicator as a basis for the crossover.
Trade signals are generated whenever the Reduced Lag MA lines crossover. However, instead of taking any crossover signal that presents itself, traders should first wait for price action to retest the moving average lines near the crossover point. Then, price should reject this area continuing the direction of the new trend.
The RSI indicator confirms the trend. As price action crosses over the moving average lines, the directional bias on the RSI line also shifts. Then, as price action retests and rejects the moving average lines, the RSI line should also bounce off level 50 or the support or resistance markers.
Indicators:
- Reducedlagma
- MA Period: 36
- MA Sampling Period: 24
- Relative Strength Index
- Period: 19
Preferred Time Frames: 1-hour, 4-hour and daily charts
Currency Pairs: FX majors, minors and crosses
Trading Sessions: Tokyo, London and New York sessions
Buy Trade Setup
Entry
- Price action should cross above the moving average lines.
- The red line of the Reduced Lag MA indicator should cross above the blue line.
- The RSI line should cross above 50 and find support above 45.
- Price action should retest and reject the moving average lines.
- Enter a buy order on the confirmation of these conditions.
Stop Loss
- Set the stop loss on the support below the entry candle.
Exit
- Close the trade as soon as price closes below the blue line of the Reduced Lag MA indicator.
Sell Trade Setup
Entry
- Price action should cross below the moving average lines.
- The red line of the Reduced Lag MA indicator should cross below the blue line.
- The RSI line should cross below 50 and find resistance below 55.
- Price action should retest and reject the moving average lines.
- Enter a sell order on the confirmation of these conditions.
Stop Loss
- Set the stop loss on the resistance above the entry candle.
Exit
- Close the trade as soon as price closes above the blue line of the Reduced Lag MA indicator.
Conclusion
This trading strategy is a working trading strategy. Many professional traders who trade trend reversals make use of price action retest on the level of support or resistance, which in this case is a dynamic moving average line.
Traders who also use this type of crossover trading method make use of an oscillator to help them identify the trend bias. The RSI line is a perfect pair for such kind of trading strategy.
Traders who could effectively identify price action retesting and rejecting the area of the moving average crossover can make use of this strategy effectively.
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