One of the simplest and most effective methods for staying on the right side of the trend is the use of moving averages. Moving averages can provide traders with a quick visual representation of whether price is moving up, down, or sideways.
A commonly used moving average by short to intermediate term traders is the 20-period exponential moving average. This moving average may be especially useful in markets such as forex, which may exhibit a tendency to trend.
Here is an extremely simple strategy for trading forex using the 20-period exponential moving average (EMA). This strategy may be utilized on an intraday basis as well as longer time frames:
- If the 20-period EMA is pointing higher, look to enter long positions only.
- If the 20-period EMA is pointing lower, look to enter short positions only.
- For longs, look to buy pullbacks to the 20-period EMA.
- For shorts, look to sell rallies to the 20-period EMA.
- Stop placement should be just on the other side of the 20-period EMA or just above or below the nearest point of technical significance.
- Exit the position when the 20-period EMA is no longer pointing up or down, but sideways.
That’s it! No crazy indicators, complicated oscillators, volume studies, or other indicators. The 20-period EMA allows you to focus on the most important indicator of all – the only one that really matters – price.
While this strategy may seem deceptively simple, it can be quite powerful. The use of the moving average will help you to stay on the path of least resistance and trade with the prevailing trend at the time. It also provides a simple reference point for stop placement as well as profit taking. The strategy can be combined with other technical levels such as pivot points or prior support for even more potentially powerful trade signals.