Forex Trading Strategy – Combining Exponential and Weighted Moving Averages

Forex Trading Strategy – combining Exponential and Weighted Moving Averages

You will learn about the following concepts

  • Indicators used with this strategy
  • Signals to be looking for
  • Entry point
  • Stop-loss
  • Profit target

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For this strategy we will be examining the 1-hour chart of USD/CAD. The indicators we will be using are: an 18-period Exponential Moving Average (EMA) (white on the chart below), a 28-period EMA (also white), a 5-period Weighted Moving Average (WMA) (yellow on the chart below), a 12-period WMA (blue on the chart below) and the Relative Strength Index (RSI) with its period set to 21, oversold level to 30 and overbought level to 70.

The two exponential moving averages form a tight area and provide indication in regard to the beginning and the end of a trend in a longer term. The two weighted moving averages indicate where a trader can enter and exit the market in a shorter term and also indicate how strong the trend is.

A trader will usually look for a long entry, only when the area between the two EMAs is very tight or is crossed. Also, the 5-period WMA and the 12-period WMA need to cross the area from below to the upside. In case the 5-period WMA crosses the 12-period WMA also from below to the upside, this additionally boosts the signal. The RSI needs to be above the level of 50.00. The trader will close his/her position, after the market has peaked and the 5-period WMA crosses the 12-period WMA from above to the downside.

A trader will usually look for a short entry, only when the area between the two EMAs is very tight or is crossed. Also, the 5-period WMA and the 12-period WMA need to cross the area from above to the downside. In case the 5-period WMA crosses the 12-period WMA also from above to the downside, this additionally boosts the signal. The RSI needs to be below the level of 50.00. The trader will close his/her position, after the market has plunged to a bottom and the 5-period WMA crosses the 12-period WMA from below to the upside.

Below are two examples in regard to this strategy, a short entry and a long entry.

chart 4.0

chart 4.1

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