Become profitable - System # 1 - GBP/JPY and 50 EMA

I do not consider myself an expert trader. I am far from being a professional. In the past three years, I burnt most of my money trading forex because I did not know what I was doing, and because I fell for a lot of scams. But I have a persistent personality, and when I start something I make it a point to finish.

In the past 6 months, I have been paper trading. Testing every strategy on this forum, on the internet… Buying and testing all the indicators you can imagine. It has taught me a lot and I have created 5 strategies that I think will help me (hopefully you too) to become profitable and make a living from Forex. I will never talk about money management, psychology and whatnot. Just the pure, mere strategies. In this post I will present to you my first strategy. It’s my least favorite of all of the 5, but I will build up the suspense until I reveal my ultimate strategy in my last and 5th post. This is one of my least favorite strategy because it is meant to scalp on M5. And any trader who respect himself, in my opinion, should not trade lower than H1, to avoid the noise and the spread disadvantage. The strategies I will give you later on will be much more powerful because they are based on H1, H4, and Daily, and obviously are meant to make some serious pips, without risk.

But, hey, scalping is fun sometimes, when nothing else comes up on the higher timeframe. So here it is. The strategy should work on most pairs, but I choose GBP/JPY when it comes to scalping because we all know that the moves are deeper and the pairs gives a lot of pips when it’s trending, or for that matter, even when it’s ranging. And today, there are a lot of good brokers that give you low spread on that pair. I trade it with a spread of 1.8, commissions included.

You will discover throughout my 5 strategies that one thing I learned, and you all need to know, is to always keep things simple. No need to cluster your screen with dozens of indicators that will either contradict each other, or take too long to line up and make you enter your trade too late, or at the best they will just all tell you the same thing. So this strategy is pure basics of technical analysis. It does not get simpler than that. A 5 year old could trade it.

Indicator: 50 EMA
Chart: GBP/JPY M5

Signal to Buy:
You all guessed! Candles cross over the 50EMA… BUT… a simple cross is not enough. We need to avoid ranging periods and whipsaws. So once a first candle has closed over the 50EMA, we will wait for a second candle to close over the EMA before we enter the trade. The second candles is very important for confirmation and needs to respect the very important following rule:

The candle has opened above the 50EMA, it has also closed above the 50 EMA, and it is very important that the second candle is also green. If the candles opened and closed about the 50 EMA, but it is red, do not enter the trade, as it’s a good sign that you may get stuck in a ranging market. Not so good for scalping.

Signal to Sell is just the opposite, of course…

Please, see below for a few examples of good trades.




Here another example that shows that this strategy works even better during trending hours.



The good thing about this strategy is that the win/lose ration is very favorable to us. That is because when you enter a trade on a false signal, you will know about it soon enough. Let me explain further. I do not put any SL. The reason is that 80%+ of the trades will be winners. But when they loose, you know soon enough because a signal in the opposite direction will be generated. At that moment you can close your loosing trade with a minimum loss. That’s because signals are always around the 50 EMA. So if you open a trade near the 50 EMA, and close it near the 50 EMA, you can’t really be that far from your entry price. See image below. In conclusion, with small loses and big wins, and an 80% success rate, you should be profitable!


Now, the golden question (to which I don’t have any good answer to give you) is when to exit the trade? It’s difficult, especially when scalping. I set a TP between 20 and 50, depending on the hour and the strength of the trend, and once I’m in profit i use a trailing stop. But to tell you the truth, I think the exit strategy is the reason why most traders fail. There are a lot of strategies that give you good entries, but very few that give you good exits, and that’s the key.

Anyway, I hope you like this strategy, but if it’s not for you, don’t despair, I have more tricks to come in my pocket. The next strategies will be more complex, more detailed, and I will talk more about TP and SL. For now let’s talk about this one.

Cheers
StevenSteven

1 Like

Steven thanks for sharing. May i clarify, your entry should be on the 3rd candle right?

Hello Mario,

Then entry is exactly when the second candle ends and the third candle begins.
The first candle being the one crossing the 50 EMA, and the second candle being the first one to open (and close) past the 50 EMA. Does it make sense ?

Steven

Thanks for posting this…I look forward to reading your other 4 strategies.

Quick question regarding this first strategy. In regards to your exit strategy, say you enter in a long (buy) position…if price immediately starts heading downward on you do you exit as soon as it touches the 50 EMA or do you allow it to close below the EMA before closing out? Thanks in advance.

It depends on the situation. If it’s during some quite hours, I will probably wait for a candle to cross the 50 EMA in the other direction. At this point I would close the trade and a loss of very few pips.
But if it’s during the trending hours, I think I may wait for a full opposite signal (two candles) to close my trade. Sure I may lose a few more pips (around 25), but the potential payout is also very much bigger.
It’s not a sure science. I use instinct a lot. I wish I had a sure way to know when to close a trade properly. Whether it’s losing or wining.

Steven

Great system. Simple and straight forward. If this is your least favorite, then I can’t wait to see the other ones!

Are these trades you actually took, even just on a demo/on paper, or have you spotted these afterwards?

I do not remember if I took them. I don’t trade live again yet, but I may have taken a couple of those on demo. I feel like I am close to be ready to start trading live again. I’m happy with my systems, but talking about them with you is the last step that hopefully will make them better.

But regarding those trades, it does not really matter if I took them or spotted them later on, because you would have easily spotted them live. The good thing about this system, is that it is actually a system. Not a strategy. It is a system because it is rule based. You have to wait for a few precise rules, and when they all meet up, you take the trade immediately without thinking or hesitating. Takes half of the psychology out!
I say half only because entering a trade is one thing, but once you’re in, managing your trade is a whole new issue. And the biggest one for me at least.

I like rule based systems. And I like to keep them simple, hopefully without any custom indicators, but just the default ones. Most of my systems are like this. No need for fancy indicators that at the end just tell you the same thing that the ones already included by default in Mt4. I like to keep my system simple and basics. That’s what works the best for me. I mean look at this one! What is more simple than an ema and candles crossing above or below ? I think it’s just about using the right indicator with the right setting on the right pair on the right timeframe at the right moment!

A few other examples of recent charts showing the opportunities of this system and how to deal with losing trades.





What do you guys think about the system ? Would the GBPJPY spread at your broker let you use it ? My spread is around 2 so it’s fine. But at my old broker, the spread was around 6 or 7. I could have still make profit on the wining trade, but the losing trade would hurt a bit more…

Here is an example of a bad day (but not so bad because the ones who had patience and followed the rules until the end still finish with a nice profit). I am sure that there could be worse days, and even losing day, but never too bad because this system seems to have a great quality. The wins, that are more frequent than the losses, are always much bigger in pip profit compared to the losses. The good thing is that the systems corrects itself very quickly and most of the time you are alerted of a losing trade with minimum loss. If you’re stuck in a bad day and things don’t seem to work well for you, but stop trading and come back to it later.
A lot of traders fail because they do not accept their losses and get to emotional. If you are stuck in a losing day, which surely will happen eventually, just stop and pick it up the day after. At the end of the month you should be well into profit.
It’s a marathon. Not a sprint.



For my style of trading…I like this system A LOT.

It’s simple. It’s got clear entry and exit rules. It’s got very limited downside if the trade goes against due to the built in rules…and if you’re patient you can hit some doubles and triples in your favor.

If you’re disciplined this can be a very good system. I’ve been trading for a while with systems similar to this one so I feel confident in saying that if you stay true to the rules you’ve laid out here this can be a very effective day trading strategy.

Steven many thanks for the reply. Yes, thats what i mean enter on the open of the 3rd candle. I like this strategy seems very simple. Cant wait for your other strategies too. Again, thank you for your effort to share them here for free.

Anyone plans to give it a try this week ?
Good luck guys.
Steven

Hello StevenSteven.

I like the concept of the system. Simple, almost 100% mechanical and “trade what you see” mechanism. I like it. How many test trades have you done with these parameters? WHat are the average winning pips and average losing pips?

Just an idea, what if you put an SL few pips at the highest wick of the bearish activating candle or few pips above the lowest wick of the bullish activating candle so you can pre-define your risk (1-3%), then you can trailstop once you are in 3:1 profit situation (or 1.5 : 1 or 2 : 1)…

Green line Entry Point (plus spread)
Red line StopLoss

I know you won’t enter the trade from that example but just wanna show how to put an SL. Just an idea buddy.


Ready for #2

Like this one a lot as well but really need a good exit strategy and I’m stuck. I like sufiansaid’s idea about Sl (at post 14) but was wondering if we used the the high (or low) of the SECOND candle as a SL level, instead of the first.

Can’t wait for the other systems! :smiley:

I really think that the only possible exit strategy is the one I gave in the original posts. What don’t you like about it ? It makes you exit losing trades with very small losses (especially when you compare the losses to the profit), and it prevents you from missing on good trades and huge profit just because of emotion and stress. It’s rules based. Purely mechanic. What’s not to like about it ?

Steven

Thanks for the reply!
I re-read all of the posts and am still stuck, sort of.
I understand how you get “stopped-out”, so to speak, when price crosses the EMA or a full reverse signal. Good. Like it.
But sometimes price moves into profit, say, 15-20 pips, THEN turns around and crosses the EMA, for a loss. Ack! Should have taken 18 pips and run…but how would I know when to just let a trade run and when to shut it down?
The trailing stop? Could be. But using a TS wouldn’t give you those huge runs, like in some of your posted charts, because the TS would cut them short on retraces. Maybe even within a few candles of taking the trade. Ahh!
You said you use a trailing stop once you are in profit; what is your typical size of TS?
And finally: how do you determine position size? I typically look at my Stop Loss number of pips, convert that into about 3% of my account balance and then I know how large my position can be. But without a SL or a target, how do you determine position size?
Sorry for rambling on here, but it’s exciting!

Hi Steven,

Thanks for sharing your system. Does the [B][I]angle[/I][/B] of the EMA 50 enter into your trading strategy? If the EMA is flat, then the market is ranging…do we avoid trading when the EMA is flat? If the EMA is angled, do we only take trades in the direction of the EMA?

I will be trading your method this coming week.

Green pips for all! :35:
Bob


I’ve coded an EA based on this strategy. I haven’t tested it fully yet, only on EURUSD to check if it works. Early results aren’t very good however this can change with a better exit strategy.