The moving average bounce strategy

There are a number of moving averages which we can define as ‘authority moving averages’, those which the markets observe and where we witness the most price action. Several of these are the long-term, round number EMA’s, such as the 100 and 200 levels which a lot of forex traders use to determine if it can be considered generally as a bullish or bearish trend. Others will prefer to use the ‘exponential’ moving average which takes the more recent price moves in to account and weighs these as more important in determining the current moving average. Many forex trading strategies have also been designed using one, two or more moving averages, with entries often signalled with crossovers which can also be highly effective trading tools.

The significance of moving averages in forex trading

This strategy, however only focuses on one exponential moving average which if the 62EMA. Although this may sound like a strange value, a quick glance at any price chart will show traders that price is highly attracted to this value, before often bouncing off this and moving higher or lower. It is this bounce of the 62 EMA that we are going to try to focus on for the basis of this strategy. One of the key reasons why this EMA creates this price action is that many forex traders use the 62 EMA as a key level of support and resistance. In trading with the orders placed in the market around these levels we will try to take advantage of the momentum that this EMA creates.

The trading strategy

This strategy works best on the Euro/USD currency pairs but setups are also frequent on all other currency pairs. The setup for this strategy is a simply to apply a 62 EMA to a 5 minute candlestick chart and wait for price to move from below or above this to touch the EMA. There is often a period of confusion, or sideways movement once the candlesticks begin to open and close around the 62 EMA. This is due to the bulls and bears pulling price in either direction until a clear winner is established. The particular setup that this strategy is looking for is for one 5 minute candlestick to close touching the 62EMA and two subsequent candlesticks to close without touching the 62EMA. An example of a long setup would therefore be a bullish candle closing but touching the 62EMA and two subsequent 5 minute candles opening and closing above the 62EMA.

Entry, stop losses and take profit levels

It does not matter if the two subsequent candles close higher or lower than each other, or even the candlestick touching the 62EMA. The most important factor is that they are not touching the 62EMA at any point. The entry for this setup will be the high that has been created by the three candlesticks combined. Placing an order 1 point higher than this can help to avoid false breakouts above this. The stop loss is simply one pip below the low of the first candlestick (the candle touching the 62EMA) and take profit should be at least equal to this. The reverse will apply to short trades.