Exponential Moving Averages (described in more detail below) are at the core of tis strategy. From the beginning you should understand that I didn’t invent the 5/13/62 strategy. At least I don’t think I did. There are some extras that I add in, but essentially, all of this information is available elsewhere. That said, I believe that most of the people that write about forex have a way of putting you and I to sleep. So maybe this is the first time you’ve heard about it, but in any event, I’ll try to
keep it interesting.
Here’s where we start. With a chart:
 |
EMA's 5, 13, 62, Trading |
If the chart above doesn’t make any sense to you, even with the legend, then here’s a brief explanation:
1. The candles are easy to read. Green ones are ones that closed lower. White ones closed higher.
2. The EMA lines are crossing at the left. The 5 (red) crosses below the 13 (the yellow) and both the 5 and 13 are crossing the 62 (the blue one).
3. You can see that in this chart, the British Pound fell about 110 pips in less than a day. That’s the chart. What can we learn immediately?
1. When the 5 crosses below the 13, and both of them cross below the 62, it’s possibly a good sell signal.
2. Inversely, we can assume that the opposite is true: when the 5 crosses above the 13, and both cross above the 62, it’s a buy signal.
What is the EMA?
Moving averages are the average value of the price of a currency pair, over a certain period of time. A 5-day moving average for the EUR/USD would be the average price of the EUR/USD over a 5 day period. You can base the average on the closing, opening, or other price. Each time the MA is calculated, the earliest period is dropped and the latest period is added. In this way, the average price fluctuates according to the fixed time period.
The exponential moving average (EMA) puts the emphasis on the most recent prices, and less emphasis on the older prices. Sometimes you won’t see much difference between the EMA and the Simple Moving Average, which does not weigh any price more than another.
Is that it? Do I just look for the crosses?
I have backtested (and so have many, many others) simply buying when the signals cross above and selling when the signals cross below.
There are even companies that build trading robots that will automatically buy and sell when these signals are given. But, as much as I’d like to say differently, it’s not that easy.
There are all types of false signals (crosses that happen but that don’t turn profitable).
Here are some other principles of this strategy, divided in three sections: entering the trade, staying in the trade, exiting the trade. The principles of each section will help you maximize your gains and
minimize your losses. But first, a quick look at the tools you’ll need.
The 30 minute chart
I have used the 15 minute, 30 minute, 1hr, 4hr, daily … even the weekly chart. You can really use anything longer than 15 minutes. I recommend starting with the 15 minute or the 30 minute, so you will see more opportunities in a shorter period of time.
The 5 and the 13 alone Chart the 5, the 13, and the 62 period Exponential Moving Averages.
Making the Trade
Below you’ll find the principles behind making good trades. And avoiding the bad ones. These are guidelines. Good trades based on these guidelines are the result of applying them enough times that you begin to get a feel for the market. I want to emphasize that you can change these rules. You can
manipulate them. You will be most successful when you make this “your own,” by adjusting so that you feel most comfortable.
Holidays and other bad days
Try not to trade on holidays, especially U.S. holidays. It’s best to stay out of the market on those days and catch up on time with your family, see a movie, adjust the metal rod that was placed in your back, insert a metal rod in your back, or fire up the barbie-q and roast some weenies. Or you can back test your strategies. It’s also best to never, ever, ever, enter a trade past 14:00 GMT on a Friday. On holidays and late on Fridays, the market is unpredictable and might not move enough to give you any profit. Or it might move 50 points in one direction just for the heck of it, and then move back. Of course it might move a zillion pips, but that’s the exception rather than the rule. Then you’re stuck in what might become a losing position, but meanwhile, you’re losing money to premiums/interest paid to your broker. This is a good time to shove a metal rod into your spine.
Please take my advice and just stay out of the market, with this system, at these times. You may lose some opportunities, but you will lose (also) the chance of getting trapped in a motionless or unpredictable market.
Other systems, long term systems in particular, can work okay late on Fridays and on holidays. But that is the subject of another ebook.
One, incidentally, that I have not written yet. Trading on the 5 and the 13 You should be prepared to buy anytime the 5 crosses above the 13.
You should also be prepared to sell anytime the 5 crosses below the 13. You should be prepared to do this even if they do not simultaneously cross the 62. This does not mean that you take the trade immediately. It means that you are aware that a trade might be coming.
Is the currency pair in a DNA Spiral?
Often, a currency pair will find itself in the middle of what I call a DNA Spiral. It’s when the pair doesn’t know what to do – it just sits in a very, very tight range, like this:
As you can see, the red (5) is crossing above and below the 13 (yellow), but the signal is false – you wouldn’t make any money on these trades because, as soon as the cross occurs, it corrects itself in the opposite direction. It’s obviously best to stay out of the market on these occasions. So, if you walk up to your PC and see these DNA Spirals, make trades cautiously. If you enter the trade, then stay close to the computer and prepare to get out if the market really swings the other way.
Is the 13 crossing the 62?
The next part of the system is to watch for the 13 to cross the 62. Whether above or below (long or short positions), you’re in good territory. At these times, it might be a very, very good opportunity.
An example of what the chart looks like when this happens is pictured on the next page.
As you can see in the pink box in the chart below, the 5 (red) is crossing below the 13 (yellow) at the same time the 13 is crossing below the 62 (blue). This can be very powerful. I want you to also focus on the fact that the pair, after this crossover occurs at the pink circle, return to hit the 62 EMA again – and this is an excellent time to sell the pair all over again. This means that if you miss the original trade, it’s totally acceptable to enter the trade when the pair rises up and hits the 62.
You can see an example of this in the blue box on the chart below. This works for long and short trades – the 62 EMA will act as a dynamic level of support and resistance.
Stops and limits
Last of all, do the following:
1. Set a stop-loss at 20 pips beyond the 62 EMA.
2. Trail the trade by 20 pips (using a trailing stop loss), or:
3. Set a profit target at a recent high or low (something that creates a double top or double bottom).
During the Trade
Lots can happen during the trade. Here are some things to consider and remember during the trade.
Set it and forget it?
believe that anyone that tells you to “Set it and forget it” is appealing to your desire for quick, easy profits without any work. Right now, I would like to appeal to your desire for quick and easy profits without any work. I will do this by telling you that if you choose a recent high/low as your profit target, or a trailing stop, then you can walk away. Walking away gives you time to spend with your family, work on your computer, take out the trash, wash the dog, or start a rock band named “The PipMeisters,” with me playing the drums and this guy with really long hair at lead vocals, who smokes so his voice can be really raspy, but has family problems and sometimes has to spend the night in jail, which eventually breaks up the band and leaves us 10 years later looking a photos and saying, “Those were the days when we could rock soooo hard.” If this disappoints you, or if you don’t know if a rock band is right for you, then feel free to watch the trade while it’s open.
That’s ok too. Although many traders have experienced problems with peeing in their pants while trades are open. Of course that’s not a problem for you. Or me. Definitely not me.
Initial volatility
At the beginning of the trade, you might see some initial volatility. This means that after the candle closes, you might see the next candle go opposite from where you want it to be. Don’t get overly concerned about this. You need at least 20 pips of free room to let the trade gather momentum. And remember what I said (not about the rock band): the pair might rise up or fall down and hit the 62 EMA. This is just another opportunity to get in the trade if you did not already (or add to your position).
Exiting the Trade
We already covered this, because you set the limit at a recent high or low, or you set a 20 pip trailing stop. Let the system exit the trade for you, based on your stops and limits. Most forex dealers will guarantee stops and limits, so you’ve got little to worry about.
