Forex trading using EMAs, Slow Stochastic and RSI
This lesson will cover the following
- Exponential Moving Average Crossovers
- RSI and Slow Stochastic
- Combining the three into a viable trading strategy
In this article we will present to you a fairly simple but reliable trading strategy. It includes two exponential moving averages in conjunction with the Relative Strength Index and the Slow Stochastic Oscillator.
We will be using a 15-minute time frame, although this strategy is applicable to any other. We will use a combination of a 5- and a 10-period EMa. The Relative Strength Index uses the default lookback value – 14 periods, with its overbought and oversold levels being set at 75 and 25 respectively. The slow stochastic oscillator uses the same overbought and oversold levels – 75 and 25, a 14-period trackback setting and Slow K and D periods of 3. To learn more about the Relative Strength Index and the Stochastic Oscillators variations, read the articles “Relative Strength Index” and “Stochastic Oscillator”
Entry and exit rules are quite simple and straightforward. You need to enter the market when the 5-period EMA crosses the 10-period EMA, RSI is above the level of 50 and the Stochastics fast and slow lines are heading in the same direction, but are not in the oversold or overbought levels. For example, if the 5-period EMA penetrates the 10-period EMA from below and edges higher, you need to enter long, if RSI is above the level of 50 and the Stochastic lines are headed up but are below the overbought level of 75. Short entry signal is triggered in the opposite scenario.
Once the 5-period EMA crosses back beyond the 10-period EMA and it is confirmed by a close beyond the latter, you need to close your position. You should also exit the trade, if the Relative Strength Index drops below the 50 level. The several conditions which must be met in order to execute a trade render this strategy a good filter for trade entries. However, the small-period EMAs also have a drawback – they can get choppy and generate false exit signals. On the screenshot below you can see displayed both successful and failed signals.
As you can see, the first EMA crossover was done at (1), with the stochastic lines moving downward, while RSI was slightly below 50. The position was exited at the confirmation of the next EMA crossover, at (2). Entering immediately a long trade was abstained as RSI was still below 50.
The next scenario when all of our strategys conditions were met was at (3) and it is indicative how EMA trading systems can fail during trading ranges. We shorted below the close of bar (3), which confirmed the EMA downward crossover, but the market reversed almost immediately and stopped us out at the next bullish crossover at (4), incurring a minor loss. We decide to reverse our position since the stochastic rebounded from the oversold level, while RSI was right at the level of 50, and we exited at the next crossover at (5). The small gain offset our previous minor loss. At (5) we abstain from entering short because stochastic is already near the oversold area.
Our next entry is at the crossover at (6), followed by an exit at the crossover at (7). The last trade is another example of a failed signal during a trading range, more particularly a barbed wire. We entered on the first close below the bearish crossover at (8), supported by a bearish stochastic and RSI below 50, but the market almost immediately shifted direction and we were forced out at the next crossover at (9), which was also the point of RSI rising over 50.