Simple 5 EMA And 12 EMA With 21 RSI Forex Trading Strategy

Never be mislead by the terms “simple Forex trading strategy” thinking that it means easy.  There is nothing easy about trading but that does not mean you can’t have a simple trading strategy for Forex, Futures, Stocks, or any market and one that works if you follow the rules.

Many things work in trading.  There are many trading strategies that you can try right on this website.  In the end, finding something that:

• Makes sense to you
• You are able to trade consistently
• Has risk management built into the trading strategy

Technical analysis is a complex subject because there are so many thing that you can learn.  Too much information is not always good (although traders love to learn about the next big thing) and this Forex trading strategy keeps it simple by not including too many moving parts.

Price action is always something you want to include in a trading strategy – even a moving average trading strategy – because indicators are simply derived from price.  They lag.  Go to price and let that decide your course of action.

The trading strategy we are going to look at can be used as a:

• Day trading strategy
• Swing trading strategy
• Position trading (there are many advantage to long term trading)

Scalping is not something I would do with technical indicators but you can test this strategy and see if it works for you.  If you are looking for a Forex scalping strategy, you can search this website for one.

Time frames that you can use range from the daily chart, weekly chart, and down into the lower time frames for intra-day trading

Technical Indicators Used For This Strategy

We want to keep things as simple as we can when trading and that includes limiting the amount of technical indicators we are using.

For this trading strategy, we are using:

1. 5 EMA
2. 12 EMA
3. RSI set to the non-standard 21 periods

The exponential moving averages (EMA) are going to be used to determine the trend direction as well as the first buy signal or sell signal for trading

The RSI (Relative Strength Index) will be used to determine the strength of the trend by using the level of “50” as our line in the sand. You can use other technical indicators such as the MACD or Stochastic Oscillator but that is assuming you understand how to use them.

What Is A Buy Setup?

We are looking for two things to show up when looking at a buy signal.

1. The fast EMA (5 EMA) must cross over the 12 EMA to the upside
2. The Relative Strength Index must cross or be crossing the 50 level to the upside
3. Place an order to go long over the candlestick that turned the indicators

To refine your trade entry, you can use a candlestick pattern, break of short-term resistance, or some other trigger that shows the market has the potential to move in your direction.

Sell Signals Are Opposite Of Buy Signals

You want to see two things occur in order to short the market.

1. The fast EMA (5 EMA) must cross over the 12 EMA to the downside
2. The Relative Strength Index must cross or be crossing the 50 level to the downside
3. Place an order to go short under the candlestick that turned the indicators

This chart highlights the trades that took place on this chart.  You can see at a glance whether or not you have a signal or setup occuring.  There is no need for trend lines, multiple time frame analysis, or any other trading indicators.

The yellow highlighted area brings up an interesting thing.  Sometimes you will have the moving averages cross but the RSI is lagging.  You MUST wait until the RSI crosses the 50 level.  It is a simple thing but remember, simple is not always easy.

Some traders will see large momentum moves and want to jump in the trading in fear of “missing out”.

Do not do that.

Wait until all the variables line up to take your trade.

Stop Loss Areas

There are multiple ways to place your stop loss.  Many Forex websites talk about stop “2-3 pips above candlestick extremes” and that is incorrect.  That does not take into account any aspect of price movement.

You can use an ATR stop loss which is usually 2 X the Average True Range of price.

You can also use above swing points giving some buffer to allow for the usual ebb and flow of price

Take Profits

Using what gets you in the trade to get you out is not a bad play.  If you are short and you either lose the cross or the 50 level, exit your trade.  This will allow you to stay in the move as long as it’s valid without an arbitrary price target.

If you need targets, think of using support or resistance levels and then monitor price action at those levels

I am not a fan of using profit targets in relation to your stop loss size.  That does not allow you to bank the big winners when price decides to run.

Converging Averages Give Opportunity For Trading

The moving averages in this trading strategy also give you another trade setup when the averages converge.

What that means is that there is no separation between the moving averages which means the market is in consolidation.

In these cases, do not trade the crosses but look to take the breakout in the direction the RSI is hinting – under 50 look for shorts, over 50 are longs

Above all, ensure you are using proper risk protocols in your trades.  It does not matter what trading strategy you are using – even simple trading strategies demand that you keep on eye on your risk so you can avoid blowing your trading account when the losing streaks in trading come.