One of my friends has started trading FOREX with triple Exponential Moving Averages (EMA) crossovers. He came upon the method from Yeo Keong Hee‘s book, Secrets of FOREX Millionaires. I have always been interested in trading systems and it is rare that books talk about them. Most books would only talk about indicators and trading psychology.
I remember one of the New Market Wizards mentioned that moving averages can make a profitable trading system if coupled with good money management and position sizing techniques. It may seem too simple for most but who says trading has to be complicated.
Hence, out of curiosity, I borrowed my friend’s book and explored.
The parameters for the 3 EMAs recommended are EMA 5, EMA 20 and EMA 50. EMA 5 being the fastest and most responsive line and EMA 50 being the slowest and least responsive line.
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There are basically 3 rules for entering long/short trades.
- EMA 5 has to cross EMA 20
- EMA 20 has to cross EMA 50
- EMA 20 is at least 30 pips above EMA 50 (Long) / EMA 20 is at least 30 pips below EMA 50 (Short)
I picked a currency pair USD/SGD and applied to it’s daily chart:
(Jan 09 to Mar 09)
(Apr 09 to Jun 09)
I found that it was much accurate for daily charts than the hourly or mins charts. Maybe this is because moving average itself is a lagging indicator. Note that the above charts show that you may have to hold for months for one position. It may also mean that your trading chances are very little, say few times a year. More active traders who do not like the waiting game can explore a smaller time frames and take smaller profits each time. But like what I said, you may face more whipsaws.
An important thing to note is that this system is not complete. Not because it needs more indicators, remember simplicity? It lacks proper entry, exit and money management rules! So once the long entry signal is here, do you place a stop order above the high for the day? Or do you place a market order? Or do you place a stop order above the EMA 5 line?
Likewise for exits, do you place stop loss below EMA 20 or EMA 50? Or do you place a market order once EMA 5 turns down?
These preset rules are much more important than anything else and most people often overlook them.
Anyone uses this system or something similar? Do share with us!