It amazes me sometimes how traders are drawn to the words “Holy Grail” whenever they are associated with a trading strategy or system. As we all know, Forex and Binary options go hand in hand and for that reason I constantly check the most important Forex trading forums for new strategies, with a lot of hype behind them (just for reviewing purposes) and most of them have some things in common: a LOT of indicators on the chart and the two words, “Holy” and “Grail” used throughout the explanation. Of course, there is the other category of “systems”, the ones that begin with “You want to make a gazillion dollars in a day…blah, blah?”, but those suck big time…even more than the “Holy Grail” systems. Being sick of all the systems mentioned above, I decided to bring you one of the most simple and, in my opinion, a potentially profitable system: a system that uses a fast moving average crossover. You can find it here, free and with detailed explanation: http://forex-strategies-revealed.com/trading-strategy-ema. It uses just three Exponential Moving Averages (EMA), with periods of 10, 25 and 50 and the signal to trade is given when the 10 period EMA (Exponential Moving Average) goes through both the 25 period EMA and the 50 period EMA. If the 10 period EMA crosses upward both the other two EMAs, we choose Call and if it crosses them down, we choose Put. Let’s take a closer look at what can go wrong with this strategy.
How to Use the Fast Moving Averages Crossover System?
Ok, it’s time to have a step by step explanation of how to use this strategy. As we all know, almost none of the Binary Options brokers offer a charting package and absolutely no Technical Analysis can be conducted without a charting package so step one is getting our hands on one of those. It is pretty simple, but for this we will have to adventure into the Forex jungle. Don’t worry, we will still keep it simple and we’ll have nothing to do with trading Forex. First thing we need to do is choose a Forex broker that offers MetaTrader 4 and open a DEMO/PRACTICE account like CommuniTraders. It’s free of charge and it’s one of the most commonly used charting software. The broker choice is not as important as we won’t be investing any money in Forex, we’ll just use the charts. Once you have downloaded MetaTrader 4 (MT4), open a currency pair chart (some brokers offer commodities, precious metals, etc, but we will stick to currencies for this explanation) and then plot on that chart the three EMAs needed for the strategy. Don’t worry, a picture will come soon, but first I think some more detail about Moving Averages is needed.
The main purpose of the Moving Average is to smooth out price action and to offer us a visual aid in identifying price direction. They also serve as Dynamic Support and Resistance (I say Dynamic because they move and change according to price movement). Moving Averages are a lagging indicator, calculated and plotted on the chart by averaging the value of the last “X” periods. For example, if I use a 20 period Moving Average, it will be drawn on the chart using the average value of the closing price of the last 20 candles. No, no, don’t throw stones at me for that last sentence, that’s really how a simple Moving Average is calculated and it might seem complicated. And now I have two more things to tell you; one is bad and the other is really good. I’m going to start with the bad one: there are different types of Moving Averages… a lot of types. Let me give you some examples: Exponential Moving Averages (EMA), Smoothed Moving Averages (SMA), Linear Weighted Moving Average (LWMA) and also some exotics like Triangular Moving Average, Hull Moving Average or Adaptive Moving Average. Hoping I didn’t discourage you, I am going to give you the good news: you don’t have to do any calculation because the charting software will do it for you. All you need to do is select the appropriate Moving Average (in our case, Exponential Moving Average) by clicking on Insert (upper left side of MT4) – Indicators – Trend – Moving Average. You will be given a choice of types of Moving averages and you should select Exponential, with a period of 10 and then repeat the procedure once for the 25 EMA and once for the 50 EMA. For this strategy we use EMA (Exponential Moving Average) because its formula places more weight on the last candles in the calculation, thus making it more responsive to price action. Here are two pictures of what you should see on your screens:
Ok, now that everything is in place, we just have to wait for the conditions of the system to be met and then select Call or Put accordingly. Remember, the 10 EMA must cross both the other two down for a Put and vice versa for a Call. In our example above, the red 10 period EMA crosses down the other two so we should select a Put.
Still don’t get it? Here’s the Video:
Why the Fast Moving Averages Crossover System sucks?
The first thing I want us to focus on is that this is not a trend following system in its most basic form. The entry is triggered by a change of the current direction of price, thus a counter trend move (for the 10 EMA to cross both the other two EMAs, price must definitely change direction). However, once the EMAs are aligned the way we need them and we are in a trade, we are trading in the direction of the newly formed trend until they cross again. Given that the move that generated the EMA crossover can be just a retracement of the prevailing trend, this strategy can be risky sometimes. On the other hand, if it is not a retracement, due to the lagging nature of the Moving Averages, we can open the trade late sometimes and miss out on a big part of the action. However, the ranging market, with low volatility is the time when this system really sucks, giving us tons of late and/or false signals.
Why the Fast Moving Averages Crossover System doesn’t suck?
I can strongly state that it is not a scam. Nobody looks for any financial gains if we use the system, it is posted on a free website and the indicators used are common to any trading platform. Of course, using just three EMAs makes it very easy to trade and you don’t need to be a rocket scientist to operate it so that’s a plus too. However, one of the things I like most is the fact that it can give big profits, while the losses are kept relatively low. So, if price starts trending strongly after we enter our first trade, we can open another one as long as the three EMAs are properly aligned; if immediately after we entered a trade, price moves against us and the 10 EMA crosses back the other two EMAs, we can use the “Close Early” function of our Binary platform (if the broker we are trading with provides such function or a similar one) and we will not suffer the loss of the full amount at risk. By doing this we can increase our profits and minimize loss and we can, to some extent, neutralize the late and/or false signals given by the system in ranging, slow markets.
This might not be the “Holy Grail” and it will give us losses for sure, but we will never find the elusive 100% accuracy system and maybe if we stop searching for it and settle for a relatively accurate system and use good money management and discipline, we’ll be making money long before the Holy Grail seekers even start to. In the “Fast Moving Averages Crossover” system we have a simple to use, clear system that is by far not perfect but it can definitely bring us profits if it is used at the right time and with the right state of mind.
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