Not the Holy Grail
It is a smart forex strategy because it involves more than one condition before we take real action. At the same time it is easy technique with only three indicators required. However, you should be careful because no strategy is the Holy Grail.
You can learn how to use EMA, MACD and RSI indicators as one system for trading forex.
This strategy uses two Exponential Moving Averages (EMA), one with a period of 7, the other with a period of 26; Relative Strength Index (RSI), with a period of 14, which is used as default in MetaTrader 4; and the Moving Average Convergence Divergence (MACD) indicator with parameters 12, 26, 9.
It would be wrong to start trading on the basis of this strategy without being acquainted with the applicable indicators in it.
Bullish and Bearish Signals
The Relative Strength Index is an oscillator and a leading indicator, its values range from 0 to 100. It will never rise above 100 and will not drop below 0, but the most important levels are between 30 and 70.
As soon as the RSI rises above 70, we believe the currency pair is overbought and we would expect prices to fall; if the RSI falls below 30, we believe the currency pair is oversold and we would expect prices to increase.
First, we need to apply the indicator to the chart in MetaTrader 4. We would buy the currency pair if the 7-period EMA crosses on top of the 26-period EMA; RSI must be above the level of 50 (this is not a default level, so you have to put it by yourself). MACD is moving up.
You should definitely detect all these three conditions before taking any action.
In order to sell the currency pair, it is necessary that the 7-period EMA crosses the 26-period EMA downstream and the RSI is below 50 (apply this level yourself). MACD should go down. It is important to detect all three conditions.
Why this Strategy is not the Holy Grail
As you can see from the examples above, as soon as all three conditions are met, the price starts to move quickly in the expected direction. However, remember that we specifically sought these setups, and in real market conditions, the situation may be quite different.
This strategy is not the Holy Grail of forex trading, and sometimes the market can go against us for so long that we will find ourselves at a loss. Moreover, with volatility and price bands, false signals may be generated.
Level 50 of the RSI indicator is often considered a confirmation of the trend, and if we enter into a transaction based on the breakdown of this level, we might see the price goes in the direction of the trend.
This in an easy strategy that might help us in identifying a potential trend on any currency pair. Because this strategy involves three conditions for an entry, it gives us some sort of protection of false signals. However, you should be aware that all systems based on indicators will eventually generate false signals sooner or later.