A Simple Forex System That Uses Moving Averages, Candlesticks And Divergence Patterns!
In this post, I am going to explain my simple trading system that doubles my account every month with just 2-3 almost set and forget trades. Basically I will be trading on H4 timeframe plus the D1 timeframe. I also use this simple system to trade forex binary options. Before you continue reading this post, you should download these 2 FREE PDFs on trading with moving averages, candlesticks and divergence patterns. Both these PDFs are FREE and after reading them you will have a fair idea on how to combine moving averages with candlesticks and divergence patterns. Once you have gone through these 2 PDFs, you can continue reading below as now you will be in a much better position to understand what is being explained below. Now install the candlestick patterns recognition software on your MT4 platform. In the Custom Indicator Settings, turn both Show_Candlestick_Patterns and Show_Divergence_Patterns to true plus set the Reliability as 2. Use the two moving averages 8 EMA (red) and 34 EMA (yellow). We will be trading GBPUSD on H4 timeframe. Now below is the recent trade that I had made. As you can see a divergence pattern appeared on 1st November. This divergence pattern is being confirmed by the Three Outside Down candlestick pattern meaning a downtrend is about to start. Three Outside Down is a strong downtrend signal which is being reinforced by a bearish divergence pattern. Both these signals are confirming each other meaning we have a high probability trade setup infront of us that we should plan to take. You don’t have to do anything. The candlestick pattern recognition software will inform you when a divergence pattern appears as well when a candlestick pattern appears.
Now we are not going to enter into a trade yet. We will be using the two EMAs as a filter that will further confirm that the trend is indeed down. As you can see the two moving averages did indeed cross each other. 8 EMA (red) crossed below the 34 EMA (yellow) on 2nd November. This is the time to enter into a trade around the price 1.6100. Now you just stay in the trade as long as the 8 EMA (red) is below the 34 EMA (yellow). On 19th November, 8 EMA (red) crossed 34 EMA (yellow again). You got out around 1.5900 making a profit of 200 pips. How much time did you take to monitor the trade during these 19 days, not more than 10-15 minutes each day. You made 200 pips and you did not need more than 10 minutes daily to check whether the trend was still down or not. This is called Low Maintenance Trading. As I have said above the candlestick pattern combined with the divergence pattern were pretty strong that a downtrend is in place. This was further confirmed by the two EMAs crossing each other. If you were trading with a deposit of $1000, you could have opened a
trade with a lot size of 0.4. The margin requirement would have been around $175 so you could have easily opened this position. Trading 0.4 lot and making 200 pips translates into a profit of $800. Now if you had $10K in your account, you could have traded with 4 lots and made $8K in 19 days. Now this is what I do. I do not open one single position. I break the lot into four small lots. So here I traded with four 0.1 lots. First 0.1 lot I entered when the divergence pattern and the candlestick pattern appeared with the stop loss placed 5 pips above the high of the candlestick pattern. I opened the second position with 0.1 lot again when the MACD signal line crossed the histogram in the down direction which is again a strong signal that the downtrend is in place. The third position was opened when the price moved down 50 pips from the second position and the fourth position was opened when the two EMAs crossed each other. You can use your own entry strategy as well. But I have found that scaling in works very well as it helps in reducing the risk drastically. Now if you are a beginner, you should start trading live with only $200. First practice on the demo account for one month then open a live account with a deposit of $200.
Now after getting out of the short trade, I had started looking for a long trade as said above. As you can see from the above screenshot, the two EMAs crossed each other on 19th November. I waited for sometime to confirm that the trend was indeed up and entered into a long trade around 1.5890 with a lot size of 0.6. Place the stop loss around 1.5870. Since I had made 200 pips in the short trade, I can now increase the lot size to 0.6 lot. I once again scaled
in around the above price and exited around 1.6100 on 3rd December making 200 pips again. So if the account equity was $1000, the total profit would have been $800+$1200=$2000. So you can see you made 200% return in around a period of 1 month with just 2 trades.
Now this is another filter that I use that tells me that the trend will stay in place. I just take a look at the daily timeframe and check the stochastic oscillator. The arrow shows the fast stochastic and the slow stochastic crossing down. So as long as both the fast and the slow stochastic are moving down, it means that the trend will be down. Instead of waiting for the two EMAs to cross each other, you should get out when the two Stochastic lines cross each other and start moving up which means that the trend has changed direction. Now when the stochastic on the daily timeframe starts moving up it means an uptrend has started. Look for another divergence pattern appearing which should be bullish this time and make a long entry accordingly. In the same manner, as long as both the slow and the fast stochastic are moving up, it means the trend is up. Every month, you will get at least two trade signals with this system. Just check the stochastic every day on the daily timeframe. When the stochastic is in the overbought region expect a breakout in the down direction and when the stochastic is in the oversold condition expect a breakout in the up direction. Once you find the stochastic in the overbought or the oversold condition switch to the H4 timeframe as shown above and check for divergence. I hope this post is going to help you a lot in your trading.
A Word Of Caution: Every month, you will get 2-4 signals with this system on one single pair. You will get plenty of time to plan the trade. After you spot the above trade setup, you will have around 24 hours to plan the trade. So, don’t rush! Plan well! This is the key to your longterm success. Only enter when the two EMAs cross each other. Stay in the trade as long as the two EMAs don’t cross. When the two EMAs cross again, get out. Always use a stop loss. Practice this strategy on the demo account for two months first! If you are a new trader, it is always a good idea to trade side by side with a professional trader. This will help you in confirming your own analysis plus you will avoid being caught by a market surprise. Sometimes, it will happen a downtrend suddenly turning into an uptrend or an uptrend suddenly turning into a downtrend pretty quickly out of expectation. This will often happen when there is a sudden announcement by the ECB President or the FED Chairman or the JCB President. Trading side by side a professional trader will help you keep abreast of these sudden developments as you will be informed well in time and you can get out of a trade to avoid unexpected market volatility. Forex Mentor PRO is a good service run by two professional trader that you can try. Another signal service that I have found to be good is the Traders Elite. The above system can be used to trade any currency pair. Using signals from a pro trading team will help you in locating currency pairs that are ready to trend! Once you have the signal, you can use your own analysis like above to plan your trade. It becomes very difficult and time consuming as well as tiring to analyze different currency pairs. Using a good signal service can help you in locating profitable opportunities on other currencies pairs that you might overlook. You can open trades on 2-4 currency pairs at the same time with the above system. Once a trade goes into profit and you have moved the stop loss into breakeven with one currency pair, you can open a second trade on another currency pair if there is a good opportunity. But practically it will become difficult to manage more than 3 trades at one time. Trading Binary Options With The Above System: Every Monday, you can check whether there is a high probability trade setup using the above system. If you find one, you can buy a put or a call depending on the market direction with expiry on Friday. Once you enter into the trade, it is set and forget. So do your analysis well before you enter into a binary options trade. Once you have made the analysis, enter into a trade. Each week, you can make an extra 7080% return as well. Please feel free to ask any question below!