Exponential MovingAverages (described in more detail below) are at the core of tisstrategy. From the beginning you should understand that I didn’tinvent the 5/13/62 strategy. At least I don’t think I did. Thereare some extras that I add in, but essentially, all of thisinformation is available elsewhere. That said, I believe that most ofthe people that write about forex have a way of putting you and I tosleep. So maybe this is the first time you’ve heard about it, butin any event, I’ll try to
keep it interesting.
Here’s where we start.With a chart:
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EMA's 5, 13, 62, Trading |
If the chart abovedoesn’t make any sense to you, even with the legend, then here’sa brief explanation:
1. The candles are easyto read. Green ones are ones that closed lower. White ones closedhigher.
2. The EMA lines arecrossing at the left. The 5 (red) crosses below the 13 (the yellow)and both the 5 and 13 are crossing the 62 (the blue one).
3. You can see that inthis chart, the British Pound fell about 110 pips in less than a day.That’s the chart. What can we learn immediately?
1. When the 5 crossesbelow the 13, and both of them cross below the 62, it’s possibly agood sell signal.
2. Inversely, we canassume that the opposite is true: when the 5 crosses above the 13,and both cross above the 62, it’s a buy signal.
What is the EMA?
Moving averages are theaverage value of the price of a currency pair, over a certain periodof time. A 5-day moving average for the EUR/USD would be the averageprice of the EUR/USD over a 5 day period. You can base the average onthe closing, opening, or other price. Each time the MA is calculated,the earliest period is dropped and the latest period is added. Inthis way, the average price fluctuates according to the fixed timeperiod.
The exponential movingaverage (EMA) puts the emphasis on the most recent prices, and lessemphasis on the older prices. Sometimes you won’t see muchdifference between the EMA and the Simple Moving Average, which doesnot weigh any price more than another.
Isthat it? Do I just look for the crosses?
I have backtested (and sohave many, many others) simply buying when the signals cross aboveand selling when the signals cross below.
There are even companiesthat build trading robots that will automatically buy and sell whenthese signals are given. But, as much as I’d like to saydifferently, it’s not that easy.
There are all types offalse signals (crosses that happen but that don’t turn profitable).
Here are some otherprinciples of this strategy, divided in three sections: entering thetrade, staying in the trade, exiting the trade. The principles ofeach section will help you maximize your gains and
minimize your losses. Butfirst, a quick look at the tools you’ll need.
The 30 minute chart
I have used the 15minute, 30 minute, 1hr, 4hr, daily … even the weekly chart. You canreally use anything longer than 15 minutes. I recommend starting withthe 15 minute or the 30 minute, so you will see more opportunities ina shorter period of time.
The 5 and the 13 aloneChart the 5, the 13, and the 62 period Exponential Moving Averages.
Making the Trade
Below you’ll find theprinciples behind making good trades. And avoiding the bad ones.These are guidelines. Good trades based on these guidelines are theresult of applying them enough times that you begin to get a feel forthe market. I want to emphasize that you can change these rules. Youcan
manipulate them. You willbe most successful when you make this “your own,” by adjusting sothat you feel most comfortable.
Holidays and other baddays
Try not to trade onholidays, especially U.S. holidays. It’s best to stay out of themarket on those days and catch up on time with your family, see amovie, adjust the metal rod that was placed in your back, insert ametal rod in your back, or fire up the barbie-q and roast someweenies. Or you can back test your strategies. It’s also best tonever, ever, ever, enter a trade past 14:00 GMT on a Friday. Onholidays and late on Fridays, the market is unpredictable and mightnot move enough to give you any profit. Or it might move 50 points inone direction just for the heck of it, and then move back. Of courseit might move a zillion pips, but that’s the exception rather thanthe rule. Then you’re stuck in what might become a losing position,but meanwhile, you’re losing money to premiums/interest paid toyour broker. This is a good time to shove a metal rod into yourspine.
Please take my advice andjust stay out of the market, with this system, at these times. Youmay lose some opportunities, but you will lose (also) the chance ofgetting trapped in a motionless or unpredictable market.
Other systems, long termsystems in particular, can work okay late on Fridays and on holidays.But that is the subject of another ebook.
One, incidentally, that Ihave not written yet. Trading on the 5 and the 13 You should beprepared to buy anytime the 5 crosses above the 13.
You should also beprepared to sell anytime the 5 crosses below the 13. You should beprepared to do this even if they do not simultaneously cross the 62.This does not mean that you take the trade immediately. It means thatyou are aware that a trade might be coming.
Is the currency pairin a DNA Spiral?
Often,a currency pair will find itself in the middle of what I call a DNASpiral. It’s when the pair doesn’t know what to do – it justsits in a very, very tight range, like this:
As you can see, the red(5) is crossing above and below the 13 (yellow), but the signal isfalse – you wouldn’t make any money on these trades because, assoon as the cross occurs, it corrects itself in the oppositedirection. It’s obviously best to stay out of the market on theseoccasions. So, if you walk up to your PC and see these DNA Spirals,make trades cautiously. If you enter the trade, then stay close tothe computer and prepare to get out if the market really swings theother way.
Is the 13 crossing the62?
The next part of thesystem is to watch for the 13 to cross the 62. Whether above or below(long or short positions), you’re in good territory. At thesetimes, it might be a very, very good opportunity.
An example of what thechart looks like when this happens is pictured on the next page.
As you can see in thepink box in the chart below, the 5 (red) is crossing below the 13(yellow) at the same time the 13 is crossing below the 62 (blue).This can be very powerful. I want you to also focus on the fact thatthe pair, after this crossover occurs at the pink circle, return tohit the 62 EMA again – and this is an excellent time to sell thepair all over again. This means that if you miss the original trade,it’s totally acceptable to enter the trade when the pair rises upand hits the 62.
You can see an example ofthis in the blue box on the chart below. This works for long andshort trades – the 62 EMA will act as a dynamic level of supportand resistance.
Stops and limits
Last of all, do thefollowing:
1. Set a stop-loss at 20pips beyond the 62 EMA.
2. Trail the trade by 20pips (using a trailing stop loss), or:
3. Set a profit target ata recent high or low (something that creates a double top or doublebottom).
During the Trade
Lots can happen duringthe trade. Here are some things to consider and remember during thetrade.
Set it and forget it?
believe that anyone thattells you to “Set it and forget it” is appealing to your desirefor quick, easy profits without any work. Right now, I would like toappeal to your desire for quick and easy profits without any work. Iwill do this by telling you that if you choose a recent high/low asyour profit target, or a trailing stop, then you can walk away.Walking away gives you time to spend with your family, work on yourcomputer, take out the trash, wash the dog, or start a rock bandnamed “The PipMeisters,” with me playing the drums and this guywith really long hair at lead vocals, who smokes so his voice can bereally raspy, but has family problems and sometimes has to spend thenight in jail, which eventually breaks up the band and leaves us 10years later looking a photos and saying, “Those were the days whenwe could rock soooo hard.” If this disappoints you, or if you don’tknow if a rock band is right for you, then feel free to watch thetrade while it’s open.
That’s ok too. Althoughmany traders have experienced problems with peeing in their pantswhile trades are open. Of course that’s not a problem for you. Orme. Definitely not me.
Initial volatility
At the beginning of thetrade, you might see some initial volatility. This means that afterthe candle closes, you might see the next candle go opposite fromwhere you want it to be. Don’t get overly concerned about this. Youneed at least 20 pips of free room to let the trade gather momentum.And remember what I said (not about the rock band): the pair mightrise up or fall down and hit the 62 EMA. This is just anotheropportunity to get in the trade if you did not already (or add toyour position).
Exiting the Trade
We already covered this,because you set the limit at a recent high or low, or you set a 20pip trailing stop. Let the system exit the trade for you, based onyour stops and limits. Most forex dealers will guarantee stops andlimits, so you’ve got little to worry about.
