4H Trading Strategy using EMAs & Candlestick Patterns

The 4-hour trading strategy using Exponential Moving Averages (EMA) and candlestick patterns is an effective method for making informed trading decisions in financial markets.

In the forex market, the 4-hour timeframe has a special meaning. The market is never closed, and traders literally trade the world. 4-hour candles represent half of each geographic trading session. Each of these sessions can present a vastly different tone, and traders can look for potential opportunities here.

The strategy involves using three EMAs with different time periods to identify the trend and using candlestick patterns to confirm potential trend reversals.

If you trade with good risk management, this is a successful forex trading strategy. Due to the large time frame of 4 hours, this trading system is very easy to follow. 

This article discusses a simple but best forex trading strategy for intermediate traders.

Definition:

The 4 Hour trading strategy involves a trend trading system consisting of 3 moving averages and candlestick patterns in a 4-hour timeframe.

Anatomy of the 4H strategy:

This trading system consists of two components.

1. Three moving averages
2. Two candlestick patterns

Purpose of using moving averages in strategy:

The Exponential Moving Average (EMA) is one of the most widely used forex trading tools. A trader uses an EMA overlay on the trading chart to determine trade entry and exit points based on where the price action is on EMA. Consider selling or shorting when it is high and buying when it is low.

Moving averages also identify trends and dynamic support/resistance zones on price charts. For example, a 200-period moving average works as a trend filter for a particular currency pair/stock. Moreover, the 23- and 38-period moving averages act as dynamic support or resistance zones. Similarly, 8j dynamic S&R zones work the same as horizontal S&R zones. Prices mostly bounce in these zones. For this reason, use this price action in trading strategies that involve the candlestick pattern as confluence.

Types of moving averages used here in this strategy:

In this trading strategy, we use exponential moving averages of different periods.

1. 23-period exponential moving average
2. 38-period exponential moving average
3. 200-period exponential moving average

The purpose of using candlestick patterns in strategy

After identifying the trend using EMA, we use candlestick patterns to confirm potential trend reversals. . The use of candlestick patterns can help traders make informed decisions by highlighting areas of support and resistance, as well as determining the prevailing market trend.

For example, the price bounces off the support zone, but it doesn’t always happen because the price can break through the support zone. Therefore, wait for a bullish candlestick pattern in the support zone to see the price recovery/reversal from the support zone. Adding candlesticks with this support zone increases the likelihood of a trend reversal.

Candlestick patterns we used in a trading strategy:

This strategy uses two popular candlestick patterns to confirm trade entries.

1. Bullish Pin bar candlestick /bearish Pin bar candlestick.
2. Bullish/Bearish Engulfing pattern.

How to trade using the 4H strategy?

 A trading strategy consists of rules that must be followed to become a successful trader.

Bullish Trade Setup:

To open a buy order in a 4-hour timeframe, you have to comply with the following conditions:

Step 1:

Identify the direction of the 200-period EMA. It should show a bullish trend and stay below the price. 

Step 2:

You need to find a bullish pin bar or bullish engulfing candlestick rejecting the dynamic support zone (23 & 38 EMAs). The price should reject the 38 EMA.

Step 3:

Open a buy order after the candle confirms and place your stop loss a few pips below the candle’s low. The last high of the price acts as a take profit level. Fibonacci expansion levels can also be used to extend the take-profit levels.

Bearish Trade Setup:

The following conditions need to be met to open a sell order in the 4-hour timeframe:

1. Analyzing the 200-period EMA should indicate a bearish trend. The 200-period EMA forms above the price during a bearish trend.

Search for bearish pin bars or engulfing candlesticks that reject dynamic resistance zones (23 & 38 EMA).

1. Once a bearish trend reversal has been confirmed with the candlestick pattern, place your stop loss a few pips above the candle. The price’s last swing low serves as the take profit level. Fibonacci expansion levels can also be used to increase your risk/reward ratio. Remember that the risk-reward ratio should always be greater than 1 in this trading strategy.

Rules of 4H strategy:

You should follow and remember the following simple rules:

Rule 1:

You should only trade in the direction of the higher timeframe trend; for example, if 200 period EMA shows a bearish trend, you should look at the chart for selling opportunities.

Rule 2:

The candlestick pattern should reject both EMAs (23 and 38 periods).

4H Candlestick close timing Table

Below is the table for candlestick closing prices on the 4-hour timeframe for different regions.

Bottomline:

The 4 hours trading strategy is a simple forex trading system. You will receive a few signals in a month. You are a successful trader if you consistently get 5% to 10% profit per month. Because after applying the compound strategy, you can generate passive income after 6-8 months.

n conclusion, the 4-hour trading strategy using EMA and candlestick patterns can be an effective way to identify the trend direction and enter trades with a high probability of success.

However, it is crucial to remember that no trading strategy is foolproof and that risk management is key to successful trading. It is advisable to test this trading strategy on a demo account before trading on a live account.