Simple EMA-20 and EMA-60 Crossover Strategy

This strategy could prove to be an easy way to look for trading opportunities. We only need to look at the price action signals for confirmation.

In the previous article, we talked about how to use SMA-100 and SMA-200 to predict trends and detect buy/sell signals. In this one, we are going to talk about another kind of Moving Average (MA), which is the Exponential Moving Average (EMA). Just like SMA, you can easily set EMA in your trading platform (if you use MT4).

There are many variations on the use of EMA in forex trading being talked about in forums. One of which is the EMA-20 and EMA-60 crossover.

The term "crossover" refers to a condition when two EMA lines cross each other. This is a good momentum to trade as crossovers usually indicate a change in the market power; where the bulls take over the trade (bullish crossovers) and vice versa.

In this case, EMA-20 serves as the fast EMA while EMA-60 functions as the slow EMA. Both are considered the ideal periods to spot trading opportunities from their crossovers.

The combination of EMA-20 and EMA-60 seems to work very well in M15 and M30 time frames. I tried it out on EUR/USD, and yes, looked like it worked very well indeed. Here's how to do it:

How to Apply EMA-20 and EMA-60 on the Chart

1. Open a M15 or M30 chart.
2. First, put in the two lines on the chart.
3. Choose Period (20), MA method (Exponential), Apply to "Close", and choose whichever color for the line (I chose red).
4. Click OK.
5. Then, Choose Period (60), MA method (Exponential), Apply to "Close", and choose another color for the line (I chose blue).
6. Click OK.
7. You will see the two EMA lines on your chart.

Identifying Buy/Sell Trades with EMA-20 and EMA-60 Crossovers

Buy signals will turn up when EMA-20 cuts EMA-60 on its way upward. While the sell signal emerges when EMA-20 cuts EMA-60 on its way downward. In the chart below, you can see how the EMA crossovers easily spot good opportunities to buy and sell EUR/USD:

Using EMA-20 and EMA-60 Crossovers with Price Action

To avoid the downside of fake signals, we can use EMA-20 and EMA-60 crossovers and confirm them with other indicators or technical analyses like price action. When we apply price action to this strategy, we would be required to pay attention closely to how the price reacts around the crossover.

Let's take an example from the scenario above:

It appears that both crossovers are supported by price action signals. Before the bullish crossover, the price forms big bullish candles. It indicates the market's confidence to buy EUR/USD. Furthermore, the third bullish candle is completely closed above the EMA line.

Then, what about the bearish crossover?

Although the price action shows more variations in which a bearish candlestick is followed by a bullish one, we could see how the upper wick of the bullish candlestick is unusually long. It shows the strong rejection from sellers to push the price higher. Additionally, the bullish candlestick is not closed above the EMA lines. It's also not followed by another bullish candlestick, indicating the market's reluctance in driving EUR/USD higher. As such, a sell trade would generate a good return.

The Drawbacks of EMA-20 and EMA-60 Crossover Strategy

Despite the simple strategy, there are several downsides that you need to pay attention to. First, EMA is a lagging indicator so the signals tend to be late to the current price condition. Second, the strategy is practically useless in ranging markets. Third, the majority of traders agree that EMA-20 and EMA-60 crossovers are good at capturing big trends, but could make some errors in between.

For you to use EMA-20 and EMA-60 as your trading indicators, make sure that they work for you. Put the crossover strategy through trial and error in demo accounts. If it works for you, then that is good news. If it is not, then you can try to arrange a different combination of EMA crossovers.