Top 5 Forex Trading Strategies For Profitable Trading In Taiwan – Some currency traders are extremely patient and like to wait for the perfect setup, while others need to see a move happen quickly or they will exit their positions. These impatient souls make perfect momentum traders because they wait for the market to have enough strength to move the currency in the desired direction and cling to the momentum in hopes of another move.
However, once this move shows signs of losing steam, an impatient momentum trader will also be the first to jump ship. A true momentum strategy therefore needs to have solid exit rules to protect profits while still being able to handle as much of the extension move as possible. The 5-Minute Momo Strategy does just that.
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The five-minute momo looks for a momentum or “momo” breakout on very short-term (five-minute) charts. First, traders rely on two technical indicators that are available with many software packages and charting platforms: the 20-period exponential moving average (EMA) and the moving average convergence divergence (MACD). The EMA is chosen over a simple moving average because it places more weight on recent movements, which is necessary for fast-paced trades.
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While the moving average is used to determine the trend, the MACD histogram, which helps us measure momentum, is used as a second indicator. The settings for the MACD histogram are the default values used in most charting platforms: EMA = 12, second EMA = 26, signal line EMA = 9, all using closing prices.
This strategy waits for a reversal trade, but takes advantage of the setup only when momentum supports the reversal enough to create a larger extension. The position is exited in two separate segments; the first half helps us lock in profits and makes sure we never turn a winner into a loser, and the second half allows us to try to capture what could become a very large move without risk because the stop has already been moved to the breakeven point. It works like this:
Our first example above is EUR/USD on March 16, 2006, when we see the price move above the 20-period EMA when the MACD histogram crosses above the zero line. Although there were several instances where the price tried to move above the 20-period EMA between 1:30 p.m. and 2:00 p.m. ET, the trade was not initiated at that time because the MACD histogram was below the zero line.
We waited for the MACD histogram to cross the zero line and when it did, the trade was initiated at 1.2044. We enter at 1.2046 + 10 pips = 1.2056 with a stop at 1.2046 – 20 pips = 1.2026. Our first target was 1.2056 + 30 pips = 1.2084. It started approximately two and a half hours later. We exit half the position and pull the remaining half by the 20-period EMA minus 15 pips. The second half is finally closed at 1.2157 at 21:35. ET for a total trade profit of 65.5 pips.
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Another example (above) is USD/JPY on March 21, 2006, when we see the price move above the 20-period EMA. As with the previous EUR/USD example, there were several instances where the price crossed the 20-period EMA just before our entry point, but we did not take the trade because the MACD histogram was below the zero line.
The MACD turned first so we waited for the price to cross the EMA by 10 pips and when it did we entered the trade at 116.67 (the EMA was at 116.57).
The math is a little trickier here. Stop is at 20-EMA minus 20 pips or 116.57 – 20 pips = 116.37. The first target is the entry plus the amount at risk or 116.67 + (116.67- 116.37) = 116.97. It starts five minutes later. We exit half the position and pull the remaining half by the 20-period EMA minus 15 pips. The second half is finally closed at 117:07 at 18:00. ET for a total average trade profit of 35 pips. Although the profit was not as attractive as the first trade, the chart shows a clean and smooth movement indicating that the price action matched our rules well.
Briefly, our first example is NZD/USD on March 20, 2006 (shown below). We see the price cross below the 20-period EMA, but the MACD histogram is still positive, so we wait until it breaks below the zero line 25 minutes later. Our trade will then be initiated at 0.6294. Like the previous USD/JPY example, the math here is a bit messy because the moving average crossover didn’t occur at the same time as the MACD moved below the zero line, as it did in our first EUR/USD example. As a result, we enter to 0.6294.
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Our stop is the 20-EMA plus 20 pips. At that time the 20-EMA was at 0.6301 so our entry is at 0.6291 and stop at 0.6301 + 20 pips = 0.6321. Our first target is entry price minus amount at risk or 0.6291 – (0.6321- 0.6291) = 0.6261. The target is hit two hours later and the stop in the second half is moved to the breaking point. We then continue to trace the second half of the position by the 20-period EMA plus 15 pips. The second half is then closed at 0.6262 for a total profit from the trade of 29.5 pips.
The above example is based on an opportunity that developed on March 10, 2006, in GBP/USD. In the chart below, the price crosses below the 20-period EMA and we wait 10 minutes for the MACD histogram to move into negative territory, triggering our entry order at 1.7375. Based on the above rules, as soon as the trade is initiated, we stop at the 20-EMA plus 20 pips or 1.7385 + 20 = 1.7405. Our first target is entry price minus amount at risk or 1.7375 – (1.7405 – 1.7375) = 1.7345. Shortly after, it will start.
We then continue to trace the second half of the position by the 20-period EMA plus 15 pips. The other half of the position is finally closed at 1.7268 for a total profit from the trade of 68.5 pips. Coincidentally, the trade was also closed at the exact moment the MACD histogram flipped into positive territory.
As you can see, the five-minute momo trade is an extremely powerful strategy for capturing momentum-based reversals. However, this does not always work, and it is important to examine an example where it fails and understand why this happens.
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The last example of a five-minute momo trade is EUR/CHF on March 21, 2006. As seen above, the price has crossed the 20-period EMA and we wait 20 minutes for the MACD histogram to move into negative territory, placing our entry order at 1.5711. We stop at the 20-EMA plus 20 pips or 1.5721 + 20 = 1.5741. Our first target is entry price minus amount at risk or 1.5711 – (1.5741-1.5711) = 1.5681. The price is trading at a low of 1.5696, which is not low enough to reach our trigger. It then continues in the opposite direction, eventually hitting our stop, resulting in a total trade loss of 30 pips.
Using a broker that offers charting platforms with the ability to automate entries, exits, stop-loss orders and trailing stops is useful when using strategies based on technical indicators.
When trading the five minute momo strategy, the most important thing to watch out for is trading ranges that are too narrow or too wide. In quiet trading hours, where the price simply hovers around the 20-EMA, the MACD histogram can swing back and forth, causing many false signals. Alternatively, if this strategy is implemented in a currency pair with too wide a trading range, the stop may be hit before the target is triggered.
This trading strategy looks for momentum on short-term, 5-minute currency trading charts that a market participant can take advantage of, and then quickly exits when momentum begins to decline.
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The 5-minute momo strategy is used by currency traders who want to take advantage of short-term momentum changes, so it could be used by day traders or other short-term market players.
Scalping is the process of entering and exiting trades multiple times per day in order to make small profits. The process of scalping in forex trading involves frequently moving in and out of forex positions in order to make small profits. A 5 minute trading strategy could be used to execute such trades.
The 5 minute momo strategy allows traders to profit from short impulses in forex pairs while providing reliable exit rules needed to protect profits. The idea is to identify a reversal as soon as it occurs, open a position, and then rely on risk management tools – such as trailing stops – to profit from the move and not jump out too early. As with many systems based on technical indicators, results will vary depending on
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