An exponential moving average strategy, or EMA strategy, is used to identify the predominant trend in the market. It can also provide the support and resistance level to execute your trade.

Now we are going to look on the simple exponential moving average strategy which uses 5 EMA and 8 EMA

This FX trading strategy works as :

• Uptrend is indicated if the faster moving average (5 EMA) crosses the slow EMA (8 EMA) to the upside
• Downtrend is indicated if the 5 EMA crosses the 8 EMA to the downside.
• Trade entries are taken after the EMA cross-over.

Timeframes : 15 min, 1 Hr
 
Instrument : You can use this strategy for any currency pairs.

Indicators : You need 5 & 8 EMA

Long Entry :

• Go long when 5 EMA crosses 8 EMA to the upside.
• Buy at the close of the candlestick that closes after the EMA’s have crossed.
• You can place stop loss 5-10 pips below the low of that candlestick

Short Entry : 

• Go short when 5 EMA crosses 8 EMA to the downside.
• Sell at the close of the candlestick.
• You can place stop loss 5-10 pips above the high of that candlestick.

Take Profit :

• Set your profit at least 3 times the risk on that trade
• or Aim to take profit at the previous swing low for a sell order and a previous swing high for a buy order.

Managing a Profitable Trade :

• When trade is moving in your favour and you want to lock in the profit then the best option is to move stop loss and place behind the high (or low) of each subsequent candlesticks that forms. For a short trade, move and place stop loss above the high the candlestick that continues to make lower highs. For a long trade, move and place stop loss below the low of each subsequent candlestick that continues to make Higher Lows.
• You may try to use a 50-80 pips trailing stop on the daily timeframe.
• Use 25-40 pips trailing stop on the 4 hr time frame.

Pros :

• You will earn high profit in a strong trending market.
• Easily understandable strategy apt for beginners

Cons :

• Poor performance in ranging markets
• Huge stop loss if you trade in higher time frame so your risk is going to be huge so you have to trade small contracts to keep your risk within acceptable levels.
• Lagging indicators and therefore every entry taken based on moving averages is effectively “late”.  That means price had already made a big move and you would have not gotten into the trade at the start of that move.
• By the time the trading strategy gives the entry signal, the market may be reversing temporarily and can knock out your stop loss as well.