Trading Strategy: EMA Breakthrough

Welcome to our Trading Strategy Series, where you will get introduced to different strategies to help you trade better. In this article, we’ll introduce you to the EMA breathrough.

The moving average (or MA for short) is one of the most reliable technical tools used by forex traders. Regardless of your level of experience, the MA indicators, when used correctly, can help you filter out the “noise” from random price movements, thus giving you a better picture of the market.

What is the EMA breakthrough trading strategy?

In simple terms, the moving average is a technical analysis tool that helps traders smooth out price action. As a lagging indicator, it is based on past prices.

There are two basic MAs that traders use: the simple moving average (SMA), which is the simple average of a forex pair over a defined time period, and the exponential moving average (EMA), which gives bigger weight to the most recent price movements.[1]

How to use the EMA setting

Why use the EMA over the SMA? Although both are good indicators, the SMA is often too simple because it places a smaller emphasis on recent price fluctuations. The EMA puts more emphasis (or weight) on the prices of the most recent days. In the case of a 5-day moving average, the EMA would place more weight on Days 3, 4 and 5. In other words, the EMA puts more emphasis on what traders have done lately.[2]

The SMA, on the other hand, gives the same weight to all price fluctuations over the specified period – whether 5 days, 20 days or 100 days.

EMA breakthrough trade

Suppose you want to use the EMA to your advantage. One of the best ways to do so is to trade the EMA breakthrough, which is based on the 50 EMA indicator.

After choosing a currency pair, set your time frame to 90 minutes, 3 hours or 4 hours (this can be done rather easily on your MT4 charting software). Now choose the 50 EMA.

Next, pay close attention to price action. If the candle pierces the 50 EMA and closes above it, enter a long position (i.e., buy the pair). If the candle pierces the 50 EMA and closes below it, enter a short position (i.e., sell it). Set your stop loss order 15 or 20 pips below the 50 EMA.[3]

In forex, a stop loss is an automatic signal to sell a currency pair once it reaches a certain level. This helps you avoid bigger losses in situations where price action goes against you.

This simple set up can give you a better visual of supply and demand in the market, thus helping you execute better trades. By experimenting with it, you’ll soon realize why moving averages are so popular.

Happy trading!

References

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