Moving averages are probably the most basic type of technical indicators. In fact, most technical indicators have an element of a moving average incorporated with it. However, despite its simplicity, moving averages are still very effective tools for traders. This is the reason why it is common to see profitable traders use a moving average of some sort in their charts. Most traders use moving averages to determine trend direction or as a dynamic area of support and resistance.
Another way traders use moving averages is as an entry signal by means of a crossover. However, this type of entry has fallen out of fashion. Some traders have had success with it while others are unprofitable with it. Still, even though some traders find it difficult to use crossovers as an entry strategy, it could still be very effective if used in the right manner.
MA Trend Confluence Forex Trading Strategy is a simple trading strategy that provides trend following trade setups based on a confluence of moving average indications. It takes into account the main trend direction as well as the short-term momentum and trend reversal to produce trade signals that could produce regular profits.
SEFC05
SEFC05 is a custom technical indicator designed to determine short-term trend reversals and momentum.
It is based on a pair of modified moving averages which crisscross across the chart. The faster moving average is blue while the slower moving average is red. The indicator also paints bars in the area between the moving average lines to help traders identify trend direction. If the blue line is above the red line, the bars are lime. If the blue line is below the red line, then the bars become orange.
The indicator could be used as a short-term trend direction indicator. Trend direction can be determined based on the color of the area between the moving averages. The same indicator could also be used as an entry signal indicator based on short-term and momentum reversals. This will be based on the crossing over of the moving average lines and the changing of the color of the area between the moving average lines.
Trading Strategy
This strategy produces trade entries based on the confluence of the short-term trend represented by the SEFC05 indicator and the 50-period Simple Moving Average (SMA).
The 50 SMA line is a commonly accepted basis for the mid-term trend. Many traders use it for guidance regarding where the trend is going. It is just fitting that we use this moving average line to determine our trade direction. In a trending market condition, price would often respect it as a dynamic support or resistance. We will base our trade direction on the general location of price in relation to the 50 SMA line as well as the slope of the 50 SMA line. Trades should be taken only in the direction of the trend as indicated by the 50 SMA line.
Aside from 50 SMA line, we should also visually observe if price action is constantly making higher highs and lows for a bullish trend, or lower highs and lows in the case of a bearish trend. Often, the 50 SMA line would confirm the trend made by price action.
After determining our trade direction, we then wait for a trade signal coming from the SEFC05 indicator that is in confluence with the direction of the trend. Trade entries will be based on the crossing over of the blue and red lines and is confirmed by the changing of the color of the bars between the two lines.
Indicators:
- 50 SMA (Green)
- SEFC05 (default setting)
Preferred Time Frames: 1-hour and 4-hour charts
Currency Pairs: major and minor pairs
Trading Sessions: Tokyo, London and New York sessions
Buy Trade Setup
Entry
- Price should be above the 50 SMA line.
- The 50 SMA line should be sloping up.
- Price action should be constantly making higher swing highs and lows.
- Enter a buy order as soon as the blue line of the SEFC05 indicator crosses above the red line while the bars change to lime.
Stop Loss
- Set the stop loss on the fractal below the entry candle.
Exit
- Close the trade as soon as the blue line of the SEFC05 indicator crosses below the red line while the bars change to orange.
Sell Trade Setup
Entry
- Price should be below the 50 SMA line.
- The 50 SMA line should be sloping down.
- Price action should be constantly making lower swing highs and lows.
- Enter a sell order as soon as the blue line of the SEFC05 indicator crosses below the red line while the bars change to orange.
Stop Loss
- Set the stop loss on the fractal above the entry candle.
Exit
- Close the trade as soon as the blue line of the SEFC05 indicator crosses above the red line while the bars change to lime.
Conclusion
This strategy is a high probability trading strategy which works best during trending market conditions. It could produce consistent profits while producing high yield trades in some instances.
It also works best when the strategy is used in conjunction with price action and candle stick patterns. This would allow traders to exit the trade based on price action reversal signals rather than wait for price to reverse totally and give back much of the profits.
It is also best to combine this strategy with another confirmation setup on the lower timeframes while aligning the trade direction with the higher timeframe trend or momentum.
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