Forex Trading Strategy – a Combination of RSI, EMA and Candlestick Setups

Written by Miroslav Marinov

Miroslav Marinov

Miroslav Marinov, a financial news editor at TradingPedia, is engaged with observing and reporting on the tendencies in the Foreign Exchange Market, as currently his focus is set on the major currencies of eight developed nations worldwide.

, | Updated: October 30, 2024

For this strategy we can use any time frame. Let us examine the 1-hour chart of USD/JPY. We will be using the following indicators: one 5-period Exponential Moving Average (EMA) (yellow on the chart below), one 12-period EMA (green on the chart below), the Relative Strength Index (RSI) with its period set to 21, overbought level – 70, oversold level – 30 and also candlestick patterns such as Hammer, Hanging Man, Inverted Hammer, Shooting Star, Bullish or Bearish Engulfing formation.

A trader will look to go long when: first, the 5-period EMA crosses the 12-period EMA from below to the upside, while the RSI reading is above the 50.00 level; second, a candlestick pattern such as a Hammer, or a Bullish Engulfing formation confirms the movement to the upside. The protective stop needs to be placed at the closest level of support.

The long position should be closed when: the 5-period EMA crosses the 12-period EMA from above to the downside, the RSI reading falls below the 50.00 level, or the market reaches and stagnates at a major level of resistance, trend line or other level of significance, or a Shooting Star/Bearish Engulfing formation appears.

A trader will look to go short when: first, the 5-period EMA crosses the 12-period EMA from above to the downside, while the RSI reading is below the 50.00 level; second, a candlestick pattern such as a Shooting Star, or a Bearish Engulfing formation confirms the movement to the downside. The protective stop needs to be placed at the closest level of resistance.

The short position should be closed when: the 5-period EMA crosses the 12-period EMA from below to the upside, the RSI reading jumps above the 50.00 level, or the market reaches and stagnates at a major level of support, trend line or other level of significance, or a Hammer/Bullish Engulfing formation appears.

Below we visualized a short trade and a long trade, based on this strategy.