Forex EMA'S 

An SMA (Smoothed moving average) is the price of a candle at a specific time-its open, mid or close. I use the closing price of a candle. A moving average line is created by dividing the closing price by the time frame. Thus a 10 day moving average on a daily chart would represent the average 10 day closing price divided by 10 days.

Like many traders I only use EMA's (exponential moving average). An Ema's is weighted so that price is more relevant to the most recent candles closing prices & reacts quicker to recent changes and is therefore more sensitive.

As with all technical indicators, there is no one type of average that a trader can use to guarantee success, but by using trial and error you can undoubtedly improve your comfort level with all types of indicators and, as a result, increase your odds of making wise trading decisions.

The 1st pair of indicators I use are 5ema (brown line) & 8ema (black line). The settings are included in your welcome email). The smaller the number, the quicker the indicator reacts. Therefore the 1 ema would the fastest & the 500 the slowest. When I used to only trade 15 minute forex charts, this was the 1st indicator I would look at. Now I do my research on a 4 hour/day chart, then 1 hour & finally 15 minute.

Trading a 15 minute Forex chart

5ema/8ema crosses.

When I was just trading 15 minute charts, various other emas & indicators would signal a trade. I would then look at the 5/8 emas to determine entry. If I was looking to short, but the 5/8 emas were pointing upwards, then I would wait for the 5ema (brown) to cross downwards over the 8ema (black). If they did not cross I would not place the trade.

In Fig 1, below, the 1st 2 candles are going up with the 5 & 8 emas pointing up. The 3rd candle is a reversal candle, so now I start to thinking of entering my short position. The 4th candle is now a confirmation of the reversal. Finally the 5ema crosses the 8 ema & points down. Now I enter a short trade.

Once the trade has been entered, I would place the stop, 5 pips + the spread above the 3rd candle. The exit would be when the 5/8 crosses back up.
This particular example below is textbook -the kind you often see in forex adverts- Easy ? No. It doesn't always work. In fact if you just traded this method you would lose.

Fig 1.

34/55 emas

The 2nd pair of indicators I use are the 34 ema (light blue) & the 55ema (dark blue). In the following 15 minute chart example lets assume it is the confirmation of the 5/8ema cross up (the 2nd red arrow), on the 1st chart that we have just looked at in fig 1. Thus, the 5/8 ema cross has given us a clue to enter long (buy/upwards). Now the candles have broken & closed above - 3rd candle - the 34/55 emas. If we were not already in the trade we would enter at the the close of this 3rd candle. The best clue is that the 34 ema (light blue) crosses the 55ema (dark blue) in an upwards direction.

Fig 2. 

TIP: In my experience, on the 15 minute chart there is an average 80+ pip move on cable & 60 + pips move on the EUR/$ after a 34/55 cross, from the opening of the jaws, after the cross. See the red arrow below. Sometimes the candle that triggers the cross can take a lot of these pips, but the 80+/60+ can give you a clue to possible areas to take profits.

Finally, see Fig 3, the strongest ema of them all for me is the 200ema (green). As I explained earlier the lower the number, the quicker the ema reacts. Therefore a 200 day ema is slow to change direction and can be used, on all time frames, as a clue to direction. In the following example, the candles are below the 200ema. Therefore, until a candle breaks it and closes above, we will only look to short (sell) as the 200ema is telling us that the direction is DOWN. The candles have risen to almost touch it a few times, but they have reversed away.

This is where we have to be careful. Imagine a 5/8 cross was telling us that the market is going to go up, but a 200ema, which is pointing down, was near to our entry (on multiple timeframes) DO NOT TAKE THE TRADE. Instead look for reasons to short it here.

Fig 3.

If my longer term chart tells me to go short (sell) I would look for confirmation on the hourly (emas, macd, stochastics & bollinger bands). If the 1 hour chart agrees with the longer time frame I will go to the 15 minute to look for the best entry.

In the following example, lets assume that the 4 hour & 1 hour charts are telling me to go short (sell). I then look at the 15 minute chart, shown below.

I have a friend who trades forex, successfully & very conservatively. He will only long a pair if the price (candles) are above the 34/55 on the 4hour. Or short (sell) if the candles are below these 2 indicators. He doesn't place too many trades, but when he does he is in for bigger stakes.

Next page: Forex trade example