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5 and 6 EMA Scalping System

The 5 and 6 EMA system is a simple scalping technique for trading the currency market. The two main indicators used are the 5 exponential moving average applied to the bar’s closing price and the 6 EMA applied to the bar’s opening price

The Entry

The entry for the basic version of the 5 and 6 EMA system is very simple. We go long when the shorter 5 EMA goes over the slightly longer 6 EMA. We go short whenever the opposite happens, we sell when the 5 EMA trades below the 6 exponential moving average. The chart below shows this trading setup on a EUR/USD 1 minute chart. The 5 EMA is shown in red, the 6 EMA is green. Notice how whenever price moves in any significant way, the MAs follow and make a crossover in that direction. The general premise behind the system is to trade the market momentum. Get in quick on a market move, get out quick. Both EMAs used are very fast (5 and 6). This means that while the system may be able to keep pace with all substantial market moves, it will also suffer greatly during market ranges.

Timeframes, Stoploss and Takeprofit

The most suitable timeframes for trading this strategy are the 1 and 5 minutes. Even 15 minutes might work ok. A simple stoploss method is to just use the most recent swing low if we’re long and the most recent swing high if we’re short. Possible take profit areas include targeting the closest resistance if we’re in a buy trade and gunning for the closest support if short. A set take profit target (example 5 or 10 pips) is also a good idea to test out. Due to the subjectivity of the exit, this part of the 5/6 EMA scalping system will be the hardest to master. The chart below was taken on the same day as the earlier example above. Notice that compared to how clear the first pic looked, this one is lot messier. The Euro moved into a range and this killed off any chance for profitability of moving average based systems. The number of trades was significantly higher and results for this period were negative overall. Clearly, a simple application of the system and taking every 5 and 6 EMA crossover won’t do. We need some filters in place.

Filters for Scalping Systems

In this section I will offer several ways you can filter your trades. Some of these will be ‘’time based’’ while others will filter entries based on recent price action or technical indicators. Most of these filters are not exclusive to the 5/6 EMA system only, you can also use them for other short-term / scalping trading systems.

Only trade from the London Open to London Close

Only trade during the busiest forex trading hours, these are from the London Open (LO) to the London Close (LC). This suggestion applies not only for this system but for all day trading forex strategies. This time slot starts at 8 AM UK time, 9 AM CET (Central European Time) or 3 AM EST for traders in the States. Some traders like to start their day a bit earlier with the Frankfurt Open at 8 AM CET but in my experience this extra hour doesn’t lead to improved results for short-term trading strategies. The London close is at 4 PM UK time, 5 PM CET and 11 AM EST (EST stands for Eastern Standard Time = New York time). Trading outside of the 9 to 17 CET time window is not recommended for scalping or any other short-term trading strategies. Click here for more on the The Three Major Forex Trading Sessions.

If short on time, trade the London and NY Open only

Trading right after the London and New York open tends to be more predictable. If you’re short on time, always try to ‘’catch’’ the London or the New York open, preferably both. As most of the volume in the currency market is driven by banks, the times when these financial institutions open does matter. As we mentioned above, UK banks open at 8 AM local time, this corresponds to 9 AM in most of Europe and 3 AM on the US East Coast. US Banks also open at 8 AM locally, this is 1 PM in the United Kingdom and 2 PM CET. The third busiest market opening is the Tokyo Open. Because Japan doesn’t observe Daylight Savings Time, calculating the exact Tokyo open will differ in summer and in winter. For more, look at the the_asian_trading_session. This of course doesn’t apply if you live in Japan, for you, the Tokyo Open is always at 9 AM JST.

The picture above shows the London Open (LO) on a EUR/USD 1 minute chart. We marked this open with a vertical line. The chart says 10 AM, this is the broker’s server time. Fxpro is based in Cyprus and the country’s time zone is ahead of the Central European Time zone by 1 hour. Notice how prices started to move a lot smoother right after the open. Not only did prices trend a lot better after the LO, before the 10 AM ‘’cut-off’’ point the Euro was basically trading aimlessly and constantly generated false crossovers. What about the New York Open? Here’s a chart of the same day at the NY open.

Similarly to the LO earlier, the New York open (NYO) was also the start of major market volatility. The vertical line on the chart marks this market open. Right before NYO, prices were trading without any clear direction. Also notice how in both the London and the New York open examples, the further you go from the open the more trends start to become unpredictable. This is why I recommend to try and stay in front of the screen for the first one or two hours after the market open.

Brakeout Boxes are your friend

Since the 5 and 6 exponential moving average crossover system is a trend following trading technique, it stands to gain from filtering range bound market conditions. And the easiest way to filter ranges is by good old price action. Setup brakeout boxes and wait for price to move outside before initiating a trade. Here’s an example of a brakeout box around the same time period covered earlier, the London Open on January 8th, 2014.

Most of the losses due to unfiltered crossover signals occurred inside the boxes. Granted, you will have to suffer that initial loss or two before prices finally settle into the range and a brakeout box can be drawn. Still, applying this method should lead to improved results as some of the losing trades will be filtered out.

Take only longs above the daily open, only shorts below the open

The next filter is something I haven’t personally used myself but many currency traders swear by it. The application of this trading restriction is very simple. If prices are currently trading above the daily open, you are allowed to only initiate long positions. If we’re trading below the open, only short trades should be taken. There are differences between traders on what constitutes as a daily open. Some like to use the most common forex daily opening time, the New York close. This is when most retail forex brokers will conduct the daily rollover. New York closes at 17:00 local time, this is 22:00 in the UK and 23:00 in most of Europe. Others prefer to use the London Open as a ‘’daily open’’ because the London session is the busiest time of the forex day. Whichever option you pick, make sure to at least perform a partial backtest and not go on ‘’gut feeling’’ alone.

The chart above shows our January 8th London Open with an added filter of the daily open. The EUR/USD was quoted at 1.3614 at the New York close / official forex day open. At LO, prices were trading only 2.8 pips higher at 1.36168. In this case, it wouldn’t matter much which daily open we used. Because prices were trading below 1.3614 we will only take short trades. This would filter out most of the losing longs. Of the 3 short trades taken that wouldn’t be filtered out, 2 ended up in the plus.

Pay attention to the longterm trend

The next useful hint is to pay attention to the longer term trend. A higher time frame movement will often ‘’override’’ the trend displayed on the lower timeframes. In addition, a lot of the moves that run counter to the longterm trend on the shorter timeframes tend to ‘’fizzle out’’ and are merely seen as opportunities to get in ‘’on the cheap’’. But let’s demonstrate this with an example.

The chart above shows the 5/6 EMA setup on the Daily chart. We marked January 8th with a yellow rectangle to make it easier to spot. Notice how the Euro was already trending down in the lead up to this date. The 5 exponential moving average is trading below the 6 EMA and prices are going down as well. Thus, we could be comfortable in only taking shorts on January 8th. As can be seen from this chart as well from our previous examples, this call would’ve been more profitable than trading the currency pair both ways. The EUR/USD lost 40 pips on this trading day.

Support and Resistance levels on higher timeframes

Support and Resistance levels on higher timeframes are something you should always pay attention to even if you only trade the lower timeframe charts. These levels can significantly impact the way price moves. The higher the timeframe, the stronger the impact on the lower TFs. The chart below shows the Euro Daily chart again, this time we marked the 1.3570 level. This is the previous daily low and also, if you look on the left of the chart you can see that 1.3570 was also a previous resistance. Mind you, there were plenty of other more important support and resistance levels on this chart but we chose to only mark this one because it was the only level that was hit on January 8th.

So how did price react once it reached this level? The next chart shows this. The first signal was a buy. If we used my suggestion to only take trades in the longterm trend, we wouldn’t have taken any longs on January 8th. In addition to this, the single currency was trading at 1.3588 at NY Open, lower than both the London Open and the New York closing prices. If you used any of these two filters you would’ve saved yourself a potential loss at the open by giving the long signal a pass. As the picture below clearly demonstrates, not long after the US open (15:00 broker time) the EUR/USD took a dive.

But the fall downward was stopped by, you guessed it, the previous resistance now turned support at 1.3570. In fact, not only did this level stop the selling attack, it also propelled Europe’s common currency higher. Less than two hours after hitting 1.3570, the Euro was trading at 1.3617, above both the London Open (1.36168) and the NY close (1.3614).

Investing | Forex | Trading| | Forex Trading | Trading Systems | Moving Average Trading Systems


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