21 and 34 Exponential Moving Average Bounce Forex Trading Strategy

December 10, 2017

990

21 and 34 Exponential Moving Average Bounce Forex Trading Strategy

Several uses for forex strategies could be done off the moving average. Previously, we’ve discussed about the 34 exponential moving average crossover as a basis for a trend reversal strategy. It allowed us to catch a trend early on and ride the trend until the end. But what if you see a trend that is already developed? What if when we opened our MT4 platform, what we see are all fully matured trends. No crossovers, no potential entries for reversal strategies? Should we just leave it or could there still be money to be made from it? If without the proper strategy and know-how, then it would be best not to do anything with that market. Chasing prices in a rally is not a good idea. But with the proper strategy, there is still so much money that could be made from it. As long as the market is moving, money could be made.

We’ve been using the moving average line as a basis for the trend. We’ve used it as a filter for different strategies that needs to be traded with the trend. But, the moving average itself could also be used as a focal point for a trend continuation strategy.

The moving average acts both as a magnet and a trampoline. It is a magnet because when price is already too far from it, it tends to pull price back to itself. It also acts like a trampoline because price also tends to bounce off it when price is already close to the moving average’s area specially during trending markets. Remember, moving averages are also dynamic supports and resistances which price does seem to respect. This strategy will be hinged on the idea that moving averages act like trampolines for price.

The 21 & 34 Exponential Moving Average (EMA)

With this forex strategy, we will be using the area near and in between these two exponential moving averages as the trampoline. On the chart below, notice how on this trending pattern, price tends to bounce off this area.

So, how do we cash in on this market phenomenon?

The Timeframes

Although this phenomenon applies to all markets, however this may yield more pips as a scalping or day trading strategy. This is because the market tends to have more erratic thrusts in price with the lower timeframes. The more of these minor thrusts we have, the more opportunities we have. With this said, we could use either the 5-minute or 15-minute charts for this.

Price Action Based Entry

With this strategy, knowledge of candlestick patterns and price action is so important. This is because you will be looking for reversal candlestick patterns on this area. Patterns such as engulfing, piercing line, dark cloud, shooting star, hammer, pin bar, etc. As soon as we recognize any of these patterns in that area, then we enter the trade on the direction of the trend.

34 EMA Based Exit

For this strategy, we will not be using any preset stop loss. Instead, because our strategy is based on a dynamic support in the form of the 21 & 34 EMA, we will also be using these dynamic supports as our basis to close the trade. If price does cross the 34 EMA, then this signifies that price may reverse. Price closing below the 34 EMA will be our trigger to close the trade.

Price Action Based Take Profit

We will be basing our take profit on the recent high or low produced by the price action. The take profit will be at the same level as the high of the previous price thrust. The logic behind this is because we are trying to trade on an already existing and mature trend. If the trend does continue, then it should produce a higher-high (bullish trend). This means that if our take profit was set on the high of the previous price action, then we could assume that our take profit will be filled since price should be pushing above it (bullish trade).

The Setups on a Bullish Trend

To indicate the entries, we will be using the yellow green lines. The forest green lines however are the take profits.

Notice how price constantly created a higher-high every time a minor thrust occurs. And notice how because of that, the take profits always get filled. On this bullish trend, there are several opportunities to employ this trend and each time profits should have been made.

If in any case price does go below the 34 EMA, which is the red line, then we should be manually closing the trade even at a loss.

The Setups on a Bearish Trend

Again, the yellow green lines are for the entries, while the forest green lines are the take profits. Notice again how price tends to break below the take profits, thus filling the take profits.

Conclusion

One of the best ways to make money out of the forex market is to trade with the trend. But it is quite difficult to predict when a trend would start. However, what we could do is to enter the market at a time when the trend is already identifiable. This strategy allows traders to do that. It allows traders to jump in on an already existing trend. On top of that, this strategy allows the traders to enter the market on the retracements, using the 21 & 34 EMA. But to really be proficient with this strategy, an understanding of candlestick patterns will be necessary.

If you are looking for a strategy on how to trade trend continuations, this would be a good starting point.