Trading Currency Futures With Dual Moving Average Crossover
Unlike most futures or stocks, currencies are open around the clock and trend substantially more than stocks, commodities and interest rates. The best type of indicators to apply to currency markets are trend following and momentum indicators.
Dual Moving Average Crossover
The moving average is one of the oldest and most often used indicators for trend following markets. As we previously discussed, there are different types of moving average and moreover different ways to use moving averages.
The simple moving average is the most basic type of moving average. The sole purpose is to add all the prices within a specified range and divide them by the same number. This creates a very balanced average of moving prices across the board.
The 50 Day And 200 Day Simple Moving Average
The 50 day simple moving average is most often used by fund managers to determine if stocks are trending up or down. The 200 day simple moving average is another favorite indicator. It is often used by market analysts to determine if the stock market index is in a long term up trend or a long term downtrend. The simple moving average is not used very often for short term market swings.
The 50 Day Simple Moving Average Is Not Fast Or Dynamic Enough For Short Term Swings
Yes, the moving average is important when finding great trade opportunities, but it's just one factor out of thousands we scan in the First Strike Portfolio strategy...
This groundbreaking system scans thousands of factors to find lightning stocks, BEFORE they strike, in a matter of seconds.
Since discovering this strategy, trader Jia Fu Wei went from losing $900 in a day to profiting $2,080!
What's the secret in the First Strike Portfolio that traders are raving about?
Exponential Moving Average
The second most popular indicator for trading currency futures as well as other quick moving markets is the exponential moving average. There is a big difference between the simple moving average and the exponential moving average. The simple moving average gives equal weight to all prices while the exponential moving average puts substantially more weight on the more recent price. This makes the exponential moving average more dynamic and better suited for short term price swings. You can see in this example how the exponential moving average reacts to price quicker than the simple moving average.
The EMA Is More Dynamic For Short Term Price Moves
The Dual Exponential Moving Average
The dual exponential moving average sounds complicated, but it’s just another way of using two EMA’s of different length together at the same time. One EMA measures the intermediate trend and the other EMA measures the short term trend. When the short term trend crosses above the longer term trend, it signals that the short term direction of the market and the intermediate direction of the market are moving in the same direction. When this occurs, it provides a long entry opportunity.
After testing dozens of combinations, I found that using the 18 bar for the intermediate term EMA and using the 9 bar for the short term EMA produce the most consistent results across the currency sector for swing trading currency futures contracts, as well as cash currency contracts (forex).
The Two Different EMA's Work Well Together
You can see in this example how the short term trend resolves in the direction of the short term trend. The short term EMA crosses above the intermediate term EMA and the market rallies strongly in the same direction moving quickly upwards.
Wait For The Currency To Trade Completely Above The Moving Average Before Entry
In this example, you can see how the intermediate trend is moving downwards and the short term EMA crosses down and begins accelerating down quicker than the intermediate term EMA. Notice how the market begins moving down rather quickly after the crossover takes place.
Waiting for the first bar to trade completely below both moving average would be the initial buy signal. Notice how long the dual moving average kept you in the trade without crossing back up. It takes patience to stay in the market this long, but it’s worth it in the end.
Wait Till Currency Trades Completely Below Moving Average To Enter
Things To Keep In Mind
Currency contracts respond well to trend following indicators. The EMA is one of the best indicators for trading currency futures, as well as cash contracts. Because the EMA is very responsive to short term price swings, using EMA crossovers tend to capture the quick changes in the short term and intermediate direction of the trend.
The 18 day (or bar) and the 9 day (or bar) EMA’s have been back tested on several currencies over the last 20 years to produce the best results for short term and swing trading these markets.
P.S. Most traders don’t spend nearly as much time thinking about their profit target compared to their entry strategy, but your profit target is responsible for how much money you make. But how do you actually optimize your trades like this? I have a technique that makes it easy to set your targets based not on conjecture, but how the actual market is behaving right now. Here’s how I do it…
This article is supplied courtesy of BookerWealth.