Top 5 Forex Trading Strategies For Beginners – Some forex traders are extremely patient and love to wait for the perfect setup, while others need to see a move happen quickly or they will abandon their positions. These impatient souls make perfect momentum traders because they wait for the market to have enough strength to push a currency in the desired direction and piggyback on the momentum in hopes of an extension.
But once the move shows signs of losing strength, an impatient momentum trader will also be the first to jump ship. Therefore, a true momentum strategy must have solid exit rules to protect profits while still being able to ride as much of the extension movement as possible. The 5-Minute Momo Strategy does just that.
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The five-minute momo looks for a momentum or “momo” burst on very short-term (five-minute) charts. First, traders settled on two technical indicators available with many charting software packages and platforms: the 20-period exponential moving average (EMA) and the moving average convergence divergence (MACD). The EMA is chosen over the simple moving average because it puts more weight on recent movements, which is necessary for quick momentum trades.
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While a moving average is used to determine the trend, MACD histogram, which helps us measure momentum, is used as another indicator. The MACD histogram settings are the defaults used in most charting platforms: EMA = 12, second EMA = 26, signal line EMA = 9, all using close prices.
This strategy waits for a reversal, but only exploits the setup when momentum supports the reversal enough to create a major extension breakout. The position is exited in two separate segments; the first half helps us lock in wins and ensures we never turn a winner into a loser, and the second half lets us try to capture what could be a very big move without risk because the stop has already moved to breakeven. That is how it works:
Our first example above is EUR/USD on March 16, 2006, where we see the price move above the 20-period EMA when the MACD histogram crosses above the zero line. Although there were a few instances of price attempting to move above the 20-period EMA between 1:30 p.m. and 2 p.m. ET, a trade was not triggered at that time because the MACD histogram was below the zero line.
We waited for the MACD histogram to cross the zero line and when it did, the trade was triggered at 1.2044. We enter at 1.2046 + 10 pips = 1.2056 with a stop at 1.2046 – 20 pips = 1.2026. Our first target was 1.2056 + 30 pips = 1.2084. It was triggered about two and a half hours later. We exit half the position and trail the remaining half with the 20 period EMA minus 15 pips. The second half finally closes at 1.2157 at 21.35. ET for a total profit on the trade of 65.5 pips.
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The next example (above) is USD/JPY on March 21, 2006, where we see the price moving above the 20-period EMA. As in the previous EUR/USD example, there were also a few instances where the price crossed above the 20-period EMA just before our entry point, but we did not take the trade because the MACD histogram was below the zero line.
MACD reversed first so we waited for price to cross the EMA by 10 pips and when it did we entered the trade at 116.67 (EMA was at 116.57).
The math is a bit more complicated on this one. The stop is at the 20-EMA minus 20 pips or 116.57 – 20 pips = 116.37. The first measure is entry plus the amount at risk, or 116.67 + (116.67- 116.37) = 116.97. It is triggered five minutes later. We exit half the position and trail the remaining half with the 20 period EMA minus 15 pips. The second half is finally closed at 117.07 at 18.00. ET for a total average profit on the trade of 35 pips. Although the profit was not as attractive as the first trade, the chart shows a clean and smooth move indicating that the price action was in accordance with our rules.
On the short side, our first example is NZD/USD on March 20, 2006 (shown below). We see the price crossing below the 20-period EMA, but the MACD histogram is still positive, so we wait for it to cross below the zero line 25 minutes later. Our trade is then triggered at 0.6294. Like the previous USD/JPY example, the math is a bit messy on this one because the crossing of the moving average did not occur at the same time as the MACD moving below the zero line, as it did in our first EUR/USD example. As a result, we enter 0.6294.
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Our stop is the 20-EMA plus 20 pips. At that time, the 20-EMA was at 0.6301, so that sets our entry at 0.6291 and our stop at 0.6301 + 20 pips = 0.6321. Our first measure is the entry price minus the amount at risk or 0.6291 – (0.6321- 0.6291) = 0.6261. The goal is scored two hours later, and the stoppage in the second half is moved to breakeven. We then continue to follow the other half of the position with the 20 period EMA plus 15 pips. The second half then closes at 0.6262, giving a total profit on the trade of 29.5 pips.
The example above is based on an option that developed on March 10, 2006, in GBP/USD. In the chart below, the price crosses below the 20-period EMA and we wait for 10 minutes for the MACD histogram to move into negative territory, thereby triggering our entry order at 1.7375. Based on the rules above, as soon as the trade is triggered, we stop at the 20-EMA plus 20 pips or 1.7385 + 20 = 1.7405. Our first measure is the entry price minus the amount at risk, or 1.7375 – (1.7405 – 1.7375) = 1.7345. It is triggered shortly after.
We then continue to follow the other half of the position with the 20 period EMA plus 15 pips. The second half of the position eventually closes at 1.7268, giving a total profit on the trade of 68.5 pips. Coincidentally, the trade was also closed at the exact time the MACD histogram turned into positive territory.
As you can see, the five-minute momo trade is an extremely powerful strategy for capturing momentum-based reversal movements. However, it doesn’t always work, and it’s important to examine an example of where it fails and understand why it happens.
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The last example of five-minute momo trade is EUR/CHF on March 21, 2006. As seen above, the price crosses below the 20-period EMA and we wait for 20 minutes for the MACD histogram to move into the negative territory, placing our entry order at 1.5711. We place our stop at the 20-EMA plus 20 pips or 1.5721 + 20 = 1.5741. Our first measure is the entry price minus the amount at risk or 1.5711 – (1.5741-1.5711) = 1.5681. The price is trading down to a low of 1.5696, which is not low enough to reach our trigger. It then continues to reverse and eventually hits our stop, causing a total trade loss of 30 pips.
It is useful to use a broker that offers charting platforms with the ability to automate entries, exits, stop-loss orders and trailing stops when using strategies based on technical indicators.
When trading the five-minute momo strategy, the most important thing is to be wary of trading ranges that are too tight or too wide. During quiet trading hours, when the price is simply hovering around the 20-EMA, the MACD histogram can flip back and forth, causing many false signals. Alternatively, if this strategy is implemented in a currency pair with a trading range that is too wide, the stop may be hit before the target is triggered.
This trading strategy looks for momentum breakouts on short-term 5-minute forex trading charts that a market participant can take advantage of, then quickly exit when the momentum begins to wane.
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The 5-Minute Momo strategy is used by forex traders who want to profit from short changes in momentum and can therefore be used by day traders or other short-term focused market participants.
Scalping is the process of entering and exiting trades several times a day to make small profits. The process of scalping in forex trading involves frequently moving in and out of forex positions to make small profits. The 5 minute trading strategy could be used to help execute such trades.
The 5-Minute Momo Strategy allows traders to take advantage of short bursts of momentum in forex pairs while providing solid exit rules required to protect profits. The goal is to identify a reversal as it happens, open a position, and then rely on risk management tools—such as trailing stops—to take advantage of the move and not jump ship prematurely. As with many systems based on technical indicators, results will vary depending
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