Forex Swing Trading Strategy #1:(5EMA And 8EMA Cross Over Swing Trading System)

Overview Of The 5EMA And 8EMA Cross Over Swing Trading System

This is one of the very basic swing trading strategies that uses 5ema and 8ema indicators. The underlying principle of this system is that if the faster exponential moving average(5ema) crosses the slower exponential  moving average(8ema) to the upside, its an
indication of an uptrend. If 5ema crosses 8ema to the downside, its an indication of a downtrend.

Timeframes: 4hrs, daily.

Indicators: 5ema & 8ema

Currency Pairs: Any

Long Entry Rules: Wait for 5ema to cross 8ema to the upside. Buy at the close of the candlestick that closes after the ema’s have crossed. Place your stop loss 5-10 pips below the low of that candlestick.

Short Entry Rules: When 5ema crosses 8ema to the downside, sell at the close of the candlestick. Place your stop loss 5-10 pips above the high of that candlestick.

Take Profit: You can use a couple of options for take profit

  • if you take trades based on the daily chart, exit on the 7th day. The 7th Day includes the  entry candlestick day.
  • similarly if you take trades based off the 4hour timeframe, exit on the 7th candlestick after the entry. The 7th candlestick includes the entry candlestick.
  • or your profit should be set at  least 3 times the risk on that trade

 

 

Trade Management :

How would you manage a profitable trade placed witht eh 5ema and 8ema cross over swing trading system? Well, here’s a couple of options you can use:

 

  • If trade moves in favour, and you want to lock in profits, the best option is to move stop loss and place behind the high(or low) of each subsequent candleticks that forms. That means for a short trade, move stop loss and place above the high the candletick that continues to make lower highs. For a long trade, move stop loss and below the low of each subsequent candletick that continues to make Higher Lows.
  • Or if on the daily timeframe, you may try to use a 50-80 pips trailing stop.
  • If on the 4hr timeframe, use 25-40 pips trailing stop.

 

Advantages of the 5EMA And  8EMA Cross Over Swing Trading System

  • easy to understand and implement.
  • in a strong trending market, there is potential to make a lot more profit when you ride out the trend with good trade management.

Disadvantages of the 5EMA And 8EMA Cross Over   Swing Trading System

  • This trading strategy would give a lot more false signals in a ranging market.
  • stop loss are quite big depending on the timeframe that is used so you need to adjust your  position sizes to bring your trading risk to an acceptable level.
  • Moving averages are lagging indicators and therefore every entry taken based on this swing trading system is effectively “late”.  Which simply means that price had already made a big move and you would  have not gotten into the trade at the start of that move because the entry of the 5ema & 8ema trading system is based on lagging moving average indicators.
  • Therefore by the time the forex trading system gives the signal to enter, the market may be due for a temporary reversal.

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4 Responses to “Forex Swing Trading Strategy #1:(5EMA And 8EMA Cross Over Swing Trading System)”

  1. This strategy works great, especially on a daily chart and when you combine it with a few more inidicators (CCI for example). I am also testing this system on H1 charts combined with heiken ashi smoothed candles…I hope it’s going to work fine.

  2. Andrew says:

    Hi,

    Might be a stupid question, but why MUST you take profits on day 7? What are the issues/risks if you don’t?

    In your example chart above, the buy trade is entered at about the end of May/start of June, but the trend doesn’t reverse until the middle of August. Why should I sell 7 days into that trend?

    Thanks,

    Andrew

    • Mangi Madang says:

      Hello Andrew,

      thanks for asking and no, its not a stupid question.

      Why take profits/close trade on the 7th day? Answer: if you close a trade on the 7th day, then you have allowed the market a bit more room for the market to move instead of closing a trade on the 2nd, 3rd 4th, 5th day etc…

      However, you have pointed out correctly about the trend still going strong past the 7th in the example trade (chart given above). Which means that you close out your trade on the 7th day, you miss those huge profits that would have come your way had you held on that trade.

      The truth is it does not matter, if you close a trade on the 7th day or on the 14th day or even on the 3rd day. The 7th day is not a rule written in concrete. You are free to use the ideas of this system and come up with your own tweaks that you think would work better for you.

      And one idea could be like this: if you don’t want to close the trade on the 7th day, then you can use the highs of candlesticks to continue to move your stop loss to lock in profits as the trade moves in favour (this is for a sell/short trade)

      Or you could move your stop loss and place above lower forming peaks as market continues to move lower.

      These two techniques would allow you to ride the trend as long as you possible can until you get stopped out or you decide to close your trade.

      So what’s the risks/issues with taking profits on the 7th day?:
      -you profits may not be large compared to riding the trend most of the way. If the trend is strong and you continue to ride it, you will make much more profit than closing a trade on the 7th day.
      -sometimes the market may make a max move 100pips in profit and then on the 7th day, the profit will only be 30pips when you close it.(this is an example only).

      Cheers

      Mangi Madang

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