Trade entry is based off the EMA signals. When the fast EMA crosses over the slow EMA, we enter a long position and vice versa. We spent considerable time backtesting optimal EMA combinations. The EMAs for the euro Standard Style Model are 10 and 20, and those for the Australian dollar Standard Style Model are 6 and 12. For example, in the euro, if the 10-period EMA is greater than the 20-period EMA, our position is long the euro at the next open of the four-hour candlestick. We can see from “Diversified risk” (below) that the Australian dollar position (red) usually acts as a hedge against the euro position.
Our trade exit depends on an indicator known as girth, which simply is the linear distance between the fast and slow EMAs. When the EMAs cross and we are entering a position, girth is at or close to zero. The stronger the trend, the wider the girth, thus the more profitable the trade. Girth is zero at the start of the trend and returns to zero at the end of the trend.