The 5-Minute Chart Trading Strategy

Some currency traders are patient and wait for the perfect setup, while others need to see a move happen quickly, or they will abandon their positions. Exponential moving averages (EMAs) are considered the best for 5-minute charts since they react faster to price changes.

Momentum traders wait for the market to have enough strength to push a currency in the desired direction and piggyback on the momentum in the hope of an extension move. A momentum strategy must have solid exit rules to protect profits.

What Is a Momo?

The five-minute momo looks for a momentum or “momo” burst on five-minute charts. Traders lay on two technical indicators with many charting software packages and platforms: the 20-period exponential moving average (EMA) and moving average convergence divergence (MACD).

EMA is chosen over the simple moving average because it places higher weight on recent movements for fast momentum trades. While a moving average is used to help determine the trend, the MACD histogram, which helps gauge momentum, is used as a second indicator. The settings for the MACD histogram are the defaults used in most charting platforms: EMA = 12, second EMA = 26, and signal line EMA = 9, all using closing prices.

This strategy waits for a reversal trade but only takes advantage of the setup when momentum supports the reversal enough to create a larger extension burst. The position is exited in two segments; the first half locks in gains and ensures the trader does not turn a winner into a loser. The second half attempts to catch a large move without risk because the stop has already been moved to a breakeven point.

Rules for a Long Trade

1. Look for currency pairs trading below the 20-period EMA and MACD to be in negative territory.
2. Wait for the price to cross above the 20-period EMA, then make sure that MACD is either in the process of crossing from negative to positive or has crossed into positive territory within the last 25 minutes (five bars or less on a five-minute chart).
3. Go long 10 pips above the 20-period EMA.
4. For an aggressive trade, place a stop at the swing low on the five-minute chart. For a conservative trade, place a stop 20 pips below the 20-period EMA.
5. Sell half of the position at entry plus the amount risked; move the stop on the second half to break even.
6. Trail the stop by breakeven or the 20-period EMA minus 15 pips, whichever is higher.

Long Trade Examples

The example above represents EUR/USD. The price moves above the 20-period EMA as the MACD histogram crosses above the zero line. Although there were a few instances of the price attempting to move above the 20-period EMA between 1:30 p.m. and 2:00 p.m. ET, a trade was not triggered at that time because the MACD histogram was below the zero line.

When the MACD histogram crossed the zero line, the trade was triggered at 1.2044. The trader enters at 1.2046 + 10 pips = 1.2056 with a stop at 1.2046 – 20 pips = 1.2026. The first target was 1.2056 + 30 pips = 1.2084. It was triggered approximately two and a half hours later. The trader exits half of the position and trails the remaining half by the 20-period EMA minus 15 pips. The second half is eventually closed at 1.2157 at 21:35 ET for a total profit on the trade of 65.5 pips.

The example above represents USD/JPY. The price moves above the 20-period EMA. Like in the previous EUR/USD example, there were also a few instances in which the price crossed above the 20-period EMA right before the entry point, but the investor did not take the trade because the MACD histogram was below the zero line.

The MACD turned first, and the trader waited for the price to cross the EMA by 10 pips and when it did, entered the trade at 116.67 (EMA was at 116.57). The stop is at the 20-EMA minus 20 pips or 116.57 – 20 pips = 116.37.

The first target is entry plus the amount risked, or 116.67 + (116.67- 116.37) = 116.97. It gets triggered five minutes later. The trader exits half of the position and trails the remaining half by the 20-period EMA minus 15 pips.

The second half is eventually closed at 117.07 at 18:00 ET for a total average profit on the trade of 35 pips. Although the profit was not as attractive as the first trade, the chart shows a clean move that indicates that price action conformed well.

Rules for a Short Trade

1. Look for the currency pair to be trading above the 20-period EMA and MACD to be positive.
2. Wait for the price to cross below the 20-period EMA; make sure that MACD is either in the process of crossing from positive to negative or crossed into negative territory no longer than five bars ago.
3. Go short 10 pips below the 20-period EMA.
4. For an aggressive trade, place the stop at the swing high on a five-minute chart. For a conservative trade, place the stop 20 pips above the 20-period EMA
5. Buy back half of the position at the entry price minus the amount risked and move the stop on the second half to break even.
6. Trail the stop by either the breakeven or 20-period EMA plus 15 pips, whichever is lower.

Short Trade Examples

The example above represents NZD/USD. The price crosses below the 20-period EMA, but the MACD histogram is still positive, so the trader waits for it to cross below the zero line 25 minutes later. The trade is triggered at 0.6294. The cross of the moving average did not occur at the same time as when MACD moved below the zero line so the trader entered at 0.6294.

The stop is the 20-EMA plus 20 pips. At the time, the 20-EMA was at 0.6301, so that puts the entry at 0.6291 and the stop at 0.6301 + 20 pips = 0.6321. The first target is the entry price minus the amount risked or 0.6291 – (0.6321- 0.6291) = 0.6261.

The target is hit two hours later, and the stop on the second half is moved to breakeven. The trader proceeds to trail the second half of the position by the 20-period EMA plus 15 pips. The second half is then closed at 0.6262, for a total profit on the trade of 29.5 pips.

The example above represents GBP/USD. The price crosses below the 20-period EMA and the trader waits for 10 minutes for the MACD histogram to move into negative territory, thereby triggering the entry order at 1.7375.

Based on the rules, as soon as the trade is triggered, the trader puts the stop at the 20-EMA plus 20 pips or 1.7385 + 20 = 1.7405. The first target is the entry price minus the amount risked, or 1.7375 – (1.7405 – 1.7375) = 1.7345. It gets triggered shortly thereafter.

The trader proceeded to trail the sec­ond half of the position by the 20-period EMA plus 15 pips. The second half of the position is eventually closed at 1.7268, for a total profit on the trade of 68.5 pips. Coincidentally, the trade was also closed when the MACD histogram flipped into positive territory.

Momo Trade Failure

The five-minute momo trade is a powerful strategy to capture momentum-based reversal moves. However, it does not always work, and the following chart denotes where and how it fails.

This example represents EUR/CHF. The price crosses below the 20-period EMA, and the trader waits for 20 minutes for the MACD histogram to move into negative territory, putting the entry order at 1.5711. The trader places the stop at the 20-EMA plus 20 pips or 1.5721 + 20 = 1.5741.

The first target is the entry price minus the amount risked or 1.5711 – (1.5741-1.5711) = 1.5681. The price trades down to a low of 1.5696, which is not low enough to reach the trigger. It then proceeds to reverse course, eventually hitting the stop, causing a total trade loss of 30 pips.

The Bottom Line

The 5-minute strategy allows traders to profit from short bursts of momentum in forex pairs. The goal is to identify a reversal as it is happening, open a position, and then rely on risk management tools—like trailing stops—to profit from the move. Like many systems based on technical indicators, results will vary depending on market conditions.