Trading Currency Futures With Dual Moving Average Crossover
Trading currency futures contracts was the topic of yesterday's tutorial. Today I will show you a great strategy to trade these contracts.
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 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 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 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, this 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 produced the most consistent results across the currency sector for swing trading currency futures contracts as well as cash currency contracts. (Forex)
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.
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.
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.
Lastly, to find the minimum tick fluctuations for different currency contracts was the video that was posted on our YouTube Channel.
It will explain how to find the minimum tick fluctuations so that you can multiply that number by the ticks to know exactly how much money has been made or lost on your position.
For more on this topic please go to: Currency Futures Trading - Learning The Basics and
Wishing you the best
By Roger Scott