Trading Systems: The Amazing Crossover System

I have experimented with a few trading systems. Most of my ideas have come from exploring the forums on babypips.com and other Forex related sights. The Amazing Crossover System is no exception. It was borrowed from a thread on baby pips, with a few alterations to better suit my trading style. At it's core, the ACS is just a simple moving average crossover system (one of the most basic rule based trading systems) with the addition of a RSI indicator (That's Relative Strength Index) for trade confirmation. Despite it's simplicity, it has probably been my most effective system to date , owing largely to the fact that's it's rules are clearly defined and easy to follow.

The setup:
I use two moving averages for this system, both EMA's. (Exponential Moving Averages give more weight to recent price action when generating the average, so they follow price more closely). I will use slightly different settings based on which graphical layout I am using on my charting software, but it will be one of the following combination. A 5 Period EMA with either a 10 Period or 12 Period EMA as the 2nd average. I then add an RSI Indicator on the bottom, using 14 periods and average price as the setting. I have found this system to work best on chart time frames from 1 hr on up. I usually use it on 1hr and 2hr charts.

1. 5 Period EMA
2. 10 Period EMA
3. RSI Indicator set to last 14 periods
4. 1hr or 2hr Charts

Rules:

1. Identify trend direction on higher time frame. Only trade signals in the direction of the longer term trend.
2. Trade signal is generated when the 5 Period EMA crosses over the 10 Period EMA in the direction of the trend AND RSI crosses over the 50 (middle) line.
3. The signals are even better if the crossover is extremely rapid (the EMA's cross at steep angles) and the RSI comes from overbought or oversold territory before crossing the 50 line.

That's it!

Note: The use of RSI for confirmation is critical to the success of this method because it helps filter outs the fake-outs often generated by this type of system where price my briefly sell of (triggering the crossover) and then immediately push higher. If you use RSI enough, you will notice that while price will frequently come from oversold or overbought levels and reflect off the 50 level back in the direction it came from, it will very rarely CROSS the 50 line without making it to the opposite side.

Here's an example of this system in action...

The AUD/USD was in a multi-day down trend indicated by the grey trendline connecting the peaks. As such, I was only looking for trades in the short direction. Indicated for each trade are the entries and exits confirmed by a crossover of the moving averages.

Things to Notice:

• The fake out we avoided before taking trade #3 (Crossover without RSI confirmation)
• In trade #3, the MA's touch twice on the way down but do not crossover, so trade remains in tact.
• There is no trade at the short term peak between trades #2 and #3 because RSI reflects off the 50 level instead of crossing it from overbought territory.