There are a number of reasons why traders prefer to trade with 5-minute charts. But, what are the best indicators to apply on this time frame?
5-minute charts show traders an overview of an asset's activity in the market for every 5 minutes within a specific trading session. The main market session is 6.5 hours per day which means a 5-minute chart will contain 78 five-minute bars for every complete trading session. Day traders tend to trade 5-minute charts as they enable them to pinpoint short-term trends, making it possible to execute their preferred trading strategy.
5-minute charts are also ideal for momentum traders who wait for the market to gain sufficient strength to move the currency in a favorable direction so that they can capitalize on the momentum for an extended move. However, once the move begins to display signs of losing strength, momentum traders will pull out which is why such traders need a strategy with reliable exit rules to protect their profits. This is what the 5-minute chart gives them.
What are the Best Indicators on 5-Minute Charts?
The 5-minute chart enables forex traders to take advantage of reversals in the market while staying in position as prices start to move in a new direction. However, to achieve optimum results with the 5-minute chart, it requires two major indicators which are the Exponential Moving Average (EMA) and Moving Average Convergence Divergence (MACD). Both of them are technical indicators and have separate functions. EMA helps to determine the trend with emphasis placed on recent movements, while MACD is used to measure momentum.
How the Strategy Works
To use the 5-minute chart with the EMA and MACD as indicators, the idea is to wait for a reversal trade and then capitalize on the setup once the momentum provides sufficient support to the reversal such that it can create a bigger extension burst.
See Also: Best Tools to Spot Trend Reversals
Exiting the position is carried out in two parts; the first part is to help the trader lock in profits and ensures that a winning trade does not turn into a losing one. The second part allows the trader to try and capture what could be a huge move without any risk since the stop has been moved already to breakeven. Let us now examine how to use the 5-minute chart together with the indicators as a trading strategy.
For a long trading position, these are the rules for using 5-minute chart with EMA and MACD:
- Identify a currency pair that is trading below the 20 EMA and MACD to get into negative territory.
- Wait for the price to move up beyond the 20 EMA and then ensure that the MACD is either about to move from negative to positive or is already in the positive territory within the last 25 minutes (five bars or less on the 5-minute chart).
- Take a long position 10 pips above the 20 EMA.
- To execute an aggressive trade, position a stop at the swing low on the 5-minute chart. However, for a conservative trade, the stop should be positioned 20 pips below the 20 EMA.
- Half of the position should be sold at entry along with the risked amount; then move the stop on the second half to breakeven.
- Trail the stop by breakeven or the 20 EMA minus 15 pips, depending on which one is higher.
For a short trading position, here are the rules:
- Identify a currency pair that is trading above the 20 EMA and MACD to get into positive territory.
- Wait for the price to move below the 20 EMA and then ensure that the MACD is either about to move from positive to negative or is already in negative territory within the last 25 minutes.
- Take a short position 10 pips below the 20 EMA.
- To execute an aggressive trade, position a stop at the swing high on the 5-minute chart. However, for a conservative trade, the stop should be positioned 20 pips above the 20 EMA.
- Half of the position should be bought back at the entry price minus the risked amount; then move the stop on the second half to breakeven.
- Trail the stop by the breakeven or the 20-period EMA minus 15 pips, depending on which one is lower.
For more variations on EMA uses on a 5-minute chart, you can refer to "5 Minute Trading Strategy with EMA".