Forex Strategies need not be complicated to be effective. Even the simplest tools preset on the MT4 is enough to make a ton of pips. In fact, simplicity gives a valuable advantage because it allows traders to decide quickly and with less stress.
Crossover strategies are one of the simplest types of forex trading strategies to employ. Its simplicity often causes many new traders to doubt its effectiveness, and as a result miss the opportunity of making profits out of the forex market. So, what is a crossover type of strategy? A crossover strategy is one in which the trigger to enter the trade is when a crossover happens. For example, price crossing over a moving average. Or a fast line indicator crossing over a slow line indicator.
The list goes on. One type of crossover strategy that may be used is a crossover of moving averages. With this strategy, trades are triggered when a faster moving average crosses over a slower moving average. Many traders who use this type of strategy may argue what type of moving average is best, simple or exponential moving average. My take on this is that it would depend on what type of trades you would want to take as each has its own strengths and weaknesses.
The exponential moving average uses a formula that gives more weight on the most recent prices. Because of this the exponential moving average tends to respond quicker than the simple moving average, plotting a more reactive line. This responsiveness, although a strength, could also be considered as a weakness.
Due to its reactiveness to recent price changes, price tends to whipsaw this moving average, causing confusion to some traders. The simple moving average on the other hand is more straight forward between the two. Since it is a straight forward averaging of price, it tends to be smoother than the exponential moving average.
Because of this, whipsaws tend to be less occurring when using the simple moving average. Because the simple moving average has lesser whipsaws, traders will be shaken off the trade less often compared to those who use the exponential moving average. For this strategy, we will be using three simple moving averages represented by the following colors:.
Crossovers between the two moving averages would be our trigger for a trade. The SMA however will represent the main intermediate trend. All the trades taken should be in the direction of the trend. Notice how the three SMAs are neatly layered on top of each other, with price plotting a clear uptrend.
For this strategy, we will not be using a hard stop loss. Instead, we will be closing the trade when price closes below the 26 SMA. This will allow us to ride the trend up until it shows a tendency to reverse.
This should result to a reversely stacked moving averages. The stop loss would again be based on the 26 SMA. Candles closing above the 26 SMA will be a trigger to close the trade. This strategy is a bit conservative. However, this lessens the possibility of entries that are potential whipsaws.
The setback is that sometimes, the entry might be late and we might be gaining less pips than if we entered a tad earlier. Although this strategy is very simple, but it could be very profitable. Its long rallies allow traders to gain more pips on their setups, especially that traders might be able to ride along almost the whole trend. The drawback though is the possible late entries and whipsaws.
What you can do however is set the entry to a fixed volume, which is considerably minimal compared to your account. The essence of this forex system is to transform the accumulated history data and trading signals. Based on this information, traders can assume further price movement and adjust this system accordingly.
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