How to Trade by EMA + Awesome Oscillator Strategy
7 minutes for reading
The medium-term trading tactics that unites a trend indicator EMA and Awesome Oscillator is a setup for working by the trend.
The authors decided against complicated solutions and supplied the advantages of a Moving Average, a most efficient instrument for determining the market trend, by the potential of an indicator confirming market entries – Awesome Oscillator.
It seems that a combination of a popular instrument and oscillator will always be the best solution for trading the trend.
The strategy is meant for H1 and larger timeframes. This means the trader can work both intraday, letting the price reach its goal within a couple of hours, and leave trades for the next day.
The article describes the right way to combine signals from the EMA and AO on H1 and how to place the Stop Loss and Take Profit.
How to set up indicators
The authors of the tactics never specified which instruments are to be used for work, yet we are convinced that traders should use currency majors and any other assets that demonstrate good lengthy trends with deep corrections.
To go by the strategy, we need an Exponential Moving Average with period 200 and an Awesome Oscillator with standard parameters. These indicators can be easily found on any trading platform and added to the chart. In MetaTrader 4, the algorithm is as follows:
- Insert – Indicators – Trend – Moving Average
- Insert – Indicators – Bill Williams – Awesome Oscillator
How to use EMA
- When the price is above the line, this indicates an uptrend, so look for signals to buy.
- When the price drops under the EMA (200), this means a downtrend, so look for signals to sell.
- For H1 and larger TFs, parameters will be the same.
How to use Awesome Oscillator
- The indicator shows the difference between two MAs with periods 34 and 5 in the form of a histogram. If the distance between the two lines grows, the current trend is getting stronger.
- When the lines start converging, this means the trend is getting weaker. Hence, there is a risk of a correction and even a trend reversal.
- When the histogram is above the zero line, the trend is bullish.
- When the histogram falls below zero, the trend is bearish.
How to buy by EMA + Awesome Oscillator
1. The price broke through the EMA (200) from below and secured above the EMA line. To make sure that the breakaway has actually happened, wait for the candlestick to close. The price above the EMA line indicates the beginning of a bullish trend.
2. The bars of the AO histogram rose above the zero line and the green line. A breakaway of the zero line from below indicates a change of the trend from the bearish to bullish one.
3. Stop Loss is placed 5 points below the low of the candlestick preceding the one on which a buying trade opens. Indeed, quite often the price returns to test the EMA line and only then it continues to grow. However, the authors of the strategy care for the strong impulse that forms in the market when the EMA line is broken. That is why the protective SL is below the nearest low. If the price does not go up at once, there is no use to keep it open.
4. Take Profit can be of the same size as the SL or as necessary: for example, with regard to the resistance level or just following the price with the SL. A TP sized as the SL is the minimum profit that one can get from the trade.
Example of buying by EMA + Awesome Oscillator
For example, look at the chart of GBP/USD on 14 March 2022.
- For some time, the price remained under the EMA line, indicating a downtrend. On 13 April at 6 p.m. the price broke through the MA from below, and this was the first signal to open a long position.
- At the AO histogram, the green bar closed above zero, so a buying position can be opened on the next candlestick at 1.3069.
- Place a Stop Loss 5 points below the low of the previous candlestick at 1.3030. The size of the SL is 39 points. Minimal TP is 39 points away from the entry point at 1.3108.
- It took three hours for the price to reach the profit. Maximum profit is 77 points, almost twice as much as the potential loss.
- The first red bar of the histogram on Awesome Oscillator formed at 1.3136, 67 points away from the entry point. As long as the authors advise exiting the market by the trader’s normal signals, a red histogram bar can be used as such a signal.
How to sell by EMA + Awesome Oscillator
1. The price broke through the EMA (200) line; check the hourly close price or the close price of the TF you use.
2. Awesome Oscillator histogram bar broke the zero line from above, and it is red.
3. The SL is 5 points above the high of the candlestick preceding the one on which the trade opens.
4. The TP is equal to the SL. Another option is to wait for a green histogram bar to form.
Example of selling by EMA + Awesome Oscillator
For example, look at the GBP/USD chart for 28 March 2022.
- Note that on 25 March 2022 the price broke through the EMA line but the histogram bars of Awesome Oscillator rested above zero. The decision was to skip the trade.
- On 28 March 2022, the price broke through the EMA line from above.
- Red bars of the Awesome Oscillator histogram dropped below zero, so on the next candlestick, a selling trade can be opened at 1.3159.
- SL is placed 5 points above the high of the previous candlestick at 1.3175. The SL is sized 16 points, and this is not much, which means the profit will not exceed 16 points.
The goal was reached 4 hours later. The trade opened at night, so volatility was low. Maximum profit of the trade was 108 points.
The green bar of Awesome Oscillator formed in a correction, so the trade could have closed almost without a profit. The conclusion is: avoid opening trades at night.
Closing thoughts
The strategy using EMA and Awesome Oscillator is a very simple option of trading the trend that also has quite simple rules.
To enter the market, the trader only needs to check signals from two indicators. The advantages of the strategy feature a small Stop Loss and availability of necessary indicators on most popular trading platforms.
The drawbacks of the platform include no chance of entering the market by the trend for the second time, because the signal forms only when the price breaks through the EMA line. While the price remains above this line, it gives no entry signal, and the instrument keeps going by the trend, so the trader loses a part of this movement.
Moreover, the authors leave the profit size to the trader’s discretion, giving just the minimum that equals the SL. Working by the strategy, the trader will understand that, firstly, a bar of the opposite colour on the Awesome Oscillator histogram is a good exit option, and secondly, the Asian trading session is not the best time for opening trades.
