EMA-20 strategy could help you navigate volatile markets with confidence. The indicator is helpful in identifying trends and dynamic support and resistance.
In the trading world, trading strategies are one of the hottest topics among traders. This is because these strategies help traders make money and grow their accounts.
But guess what? Not all trading strategies are the same. Today, we're going to talk about one of the best strategies for when the market is active; it's called the EMA-20 strategy.
Just like the name suggests, this strategy uses a tool called the Exponential Moving Average (EMA) with a period setting of 20. This tool quickly responds to changes in prices, and it's great for catching short-term trends. When you use it along with a trend already going in the same direction, it becomes even better at helping you grab good opportunities.
Now, what's the nitty-gritty of this strategy?
How can you use it on a chart?
No worries! In this article, we're going to explain exactly how to put this strategy into action.
Why EMA-20?
The EMA-20 strategy is a top choice for high-volatility markets for these four compelling reasons:
- Quick to Respond to Changes: High-volatility markets have fast and unpredictable price shifts. The EMA-20 is built to pay attention to recent prices, so it reacts quickly to sudden market changes. This helps traders catch new trends early and adjust their plans quickly.
- Less Delay: Unlike Simple Moving Averages that treat all data equally, the EMA-20 cares a lot about what just happened. This cuts down on waiting time, giving traders almost real-time signals. In markets that move fast, this is a big advantage.
- Fits Short-Term Trends: High-volatility markets have trends that come and go quickly. The EMA-20 looks at the last 20 candlesticks, which line up well with these shorter trends. This helps traders spot when trends are changing and make smart moves during shorter market swings.
- Great for beginners: The EMA-20 trading strategy is great for beginners because it's simple to follow. All you need is the EMA indicator, and it works for any currency pair and time frame.
How Does This Strategy Work?
When prices are going down in a trend, they're expected to continue dropping. But sometimes they take a break and go up a bit to test the EMA-20 line. If the downward trend is strong, the EMA-20 line can push prices back down. This testing and pushing back are called "retests."
This can happen once or a few times before the price eventually breaks through the EMA-20 line. So, think of the EMA-20 as a line that the price bounces off.
Same with the uptrend. When prices are rising in a trend, they're generally expected to continue climbing. However, there are instances when they might experience a temporary pullback and dip slightly to test the EMA-20 line. If the uptrend remains robust, the EMA-20 line can act as support and propel prices back upward.
In essence, you can visualize the EMA-20 as a dynamic support or resistance line that the price uses as a launching pad for its upward or downward momentum.
As a trader, wait for a specific moment. Look for the candlestick that goes back up or down and touches the EMA-20 line after moving away from it for a while. Watch for specific candlestick patterns that can give you a heads-up that a price bounce might be coming. Two key ones are engulfing candlesticks and pin bars.
These candlestick patterns can be like a secret language between traders and the market. When you see them, it's like the market is giving you a wink—a heads-up that things might be about to change. And that's your signal to think about opening a trade.
How to Trade the EMA-20 Trading Strategy in High Volatility
This strategy consists of three key steps: identifying the trend, determining levels, and spotting entry signals. It's important to follow these steps in sequence when applying this strategy.
1. Identifying The Trend
The first step is figuring out what trend is happening. It's pretty simple using the EMA-20 line.
- If the price is below the EMA-20 line, it means the price is on a downtrend.
- If the price is above the EMA-20 line, it means the price is on an uptrend.
2. Determining The Level
We touched on this level of explanation earlier. The EMA-20 line serves as the support or resistance level according to the current trend.
- If the trend is going up, the EMA-20 line works as the support level.
- If the trend is going down, the EMA-20 line becomes the resistance level.
3. Spotting The Entry Signal
In this strategy, we use two types of candlestick patterns: the engulfing pattern and the pin bar pattern. If either of these candlestick patterns shows up while the price tests the EMA-20 line, the entry signal is good to go. After the candlestick closes, you can jump in with a sell or buy.
Setting Stop Loss (SL) and Take Profit (TP)
Once you've entered a buy or sell position, the next step is to set your stop-loss and take-profit levels.
- For sell positions, put your stop-loss above the highest price of the signal candlestick and set your take-profit at the lowest price or the previous support level.
- For buy positions, place your stop-loss below the lowest price of the signal candlestick and your take-profit at the highest price or the previous resistance level.
To grasp this better, take a look at the image below.
4 Key Things in Trading with EMA-20 on an Active Market
You need to pay attention to four important things when using this trading strategy. Ignoring these factors could lead to less effective trading and more losses.
- Always Follow The trend
The success of this trading strategy depends on how well you stick with the current price trend. Trading with the trend increases your chances of success and improves the balance between risk and potential reward. - Use a minimum 1:2 risk/reward ratio
When the trend is strong, it's a good idea to use a risk-reward ratio of at least 1:2. This means that even if your success rate is only about 50%, you can still end up making a profit.
- Enter Trades During the London (Europe) or New York (US) Sessions
Another important aspect is entering your trades. Entering trades during London or New York sessions boosts the likelihood of your strategy working well. During the Asian session or right before the US session closes, prices usually move slowly and often go sideways. Plus, the difference between buying and selling prices tends to increase during the session close. - The Best Time Frames for This Strategy
The ideal time frame for this strategy depends on how you like to trade and how much time you have. However, a common approach is to use the 15-minute (M15) chart or the 1-hour (H1) chart. The 15-minute chart gives a good balance between catching short-term price moves and having enough data to spot trends and patterns. On the other hand, the 1-hour chart offers a broader view of price trends while still showing the details needed for making entry and exit decisions.
Bottom Line
The popularity of the EMA-20 strategy is crystal clear due to its simplicity and effectiveness. You can easily identify trends and dynamic support and resistance with EMA-20, and look for price bounces with certain candlestick patterns.
By using this strategy, you can boost your chances of making profits. Just stick to the trend and maintain a minimum 1:2 risk-reward ratio.
But before applying this strategy with real money, remember to practice in a Forex demo account. This step is crucial to test the effectiveness of this strategy on your trading plan.
10 Comments
Aug 17 2023
I've been using moving averages for a while now, especially the EMA. However, I've recently come across a strategy involving the MA20 that has piqued my interest. It aligns well with my needs and doesn't require significant adjustments. I have a good grasp of the concept and how to use it effectively.
Nevertheless, there's one challenge I face: I rely on indicators rather than candlestick patterns or chart patterns in my trading. Could you please provide a more detailed explanation of which technical indicators can be used alongside the MA20 when trading in high-volatility markets?
Aug 17 2023
Sure. When trading in high-volatility markets, using technical indicators alongside the MA20 can help provide additional insights and confirmation for trading decisions. Here are some technical indicators that can be useful in combination with the MA20:
Bollinger Bands: Bollinger Bands consist of three lines plotted on the price chart - the upper band, the lower band, and the middle band (which is the MA20). The upper and lower bands are calculated based on the standard deviation of price movements. Bollinger Bands can help identify periods of high volatility and potential price reversals when the price moves outside the bands.
Relative Strength Index (RSI): The RSI is a momentum oscillator that measures the speed and change of price movements. It ranges from 0 to 100 and is often used to identify overbought and oversold conditions in the market. When combined with the MA20, the RSI can provide confirmation for potential trend reversals or continuation.
Moving Average Convergence Divergence (MACD): The MACD is a trend-following momentum indicator that consists of two lines - the MACD line and the signal line. The MACD line is calculated by subtracting the longer-term moving average (e.g., the MA26) from the shorter-term moving average (e.g., the MA12). The signal line is a moving average of the MACD line. When the MACD line crosses above the signal line, it may indicate a bullish signal, while a cross below the signal line may indicate a bearish signal.
Stochastic Oscillator: The stochastic oscillator compares the most recent closing price to a range of prices over a specific period. It generates values between 0 and 100 and helps identify potential trend reversals or overbought/oversold conditions. When combined with the MA20, you can look for situations where the stochastic crosses above or below certain levels (e.g., 80 for overbought and 20 for oversold) while the price is near the MA20.
Average True Range (ATR): The ATR is a volatility indicator that measures the average range between high and low prices over a specified period. It can help traders gauge the potential volatility of an asset and set appropriate stop-loss levels. Combining the ATR with the MA20 can provide insights into potential price breakouts or reversals.
Volume-based indicators: In high-volatility markets, volume can provide valuable information about the strength of price movements. Volume-based indicators, such as the On-Balance Volume (OBV) or the Volume Weighted Average Price (VWAP), can be used alongside the MA20 to confirm trends or identify potential price reversals.
Aug 17 2023
I am interested in the EMA 20 method as it seems simple and effective. It is also a trend-following strategy and the confirmation of entry is clear in the text. There is also the implementation of stop loss and take profit, so the explanation is already clear in that aspect.
Now, I want to try it out, but before that, I will test it on a demo account to see if the strategy is really good or how it performs. I am actually new to this, so maybe you could provide guidance on how to conduct backtesting or testing for this strategy so that I can assess its performance.
Aug 17 2023
Certainly, testing your trading strategy on a demo account before applying it to a real trading environment is a wise approach. Backtesting allows you to simulate how your trading strategy would have performed in the past using historical price data. Here's a step-by-step guide on how to conduct backtesting for the EMA20 strategy:
Gather Historical Price Data: You'll need historical price data for the trading pair or instrument you plan to trade. You can usually download this data from your trading platform or financial data providers. Ensure you have data for the time frame you intend to trade (e.g., daily, hourly, etc.).
Define the Strategy Rules: Outline the specific rules of your EMA20 strategy. For example:
Set Up Charts: Use charting software or platforms to visualize historical price data. Plot the EMA20 on the charts, and mark the buy and sell signals according to your strategy rules.
Manual Backtesting: Go through the historical price data candle by candle. Each time a potential buy or sell signal occurs, note down whether it would have been a profitable or losing trade. Consider the following factors:
Record and Analyze Results: Keep track of your trades and their outcomes. Calculate metrics such as win rate, average profit, average loss, risk-to-reward ratio, and total profit/loss. This will help you assess the strategy's performance over the historical data.
Adjust and Refine: Based on the results of your backtesting, you might identify areas for improvement. You could consider adjusting parameters such as stop loss and take profit levels, experimenting with different time frames, or adding additional indicators for confirmation.
Demo Trading: After refining your strategy based on backtesting results, implement it on a demo account using real-time data. This will allow you to observe how the strategy performs in a simulated live market environment.
Monitor and Evaluate: As you demo trade, track the performance of your strategy. Keep records of your trades, analyze the outcomes, and make further adjustments if necessary.
Remember that while backtesting can provide valuable insights, it's important to note that past performance is not always indicative of future results.
Aug 17 2023
This method is used in highly volatile markets, where price movements are quite rapid, resulting in higher risks. In such market conditions, we need to consider the risks involved. For example, if we experience a losing streak, it can lead to overtrading.
So, risk management is very important to ensure that our mental or psychological state is maintained. Personally, I will use this strategy for scalping in the 5-minute time frame, which is why I asked about risk management. Are there any recommended risk management techniques to use with this strategy? Thanks.
Aug 17 2023
Absolutely, risk management is crucial when trading in high-volatility markets, especially when using strategies like scalping on lower time frames. Here are some recommended risk management techniques to consider when implementing the EMA20 strategy for scalping in the 5-minute time frame:
Define a fixed percentage of your trading capital that you're willing to risk on each trade. This could be, for example, 1% of your total capital. If a trade hits your predetermined maximum loss, exit the trade regardless of whether the price is near your stop loss or take profit levels.
Based on the strategy's nature, you can set tight stop loss levels to limit potential losses. The distance between your entry and stop loss levels should be manageable based on the average price movement in the 5-minute time frame.
Decide on a reward-to-risk ratio for each trade. For example, you might aim for a 2:1 ratio, meaning your take profit level is twice the distance from your entry point compared to your stop loss level. This way, even if you have more losing trades than winning trades, your profitable trades can potentially offset losses.
Set a daily or weekly limit on the number of trades you'll take. Overtrading can lead to impulsive decisions and increased risk exposure. Stick to your plan and avoid chasing after trades out of frustration or excitement.
Determine your position size (trade size) based on the percentage of your capital you're willing to risk per trade. This ensures that you're not putting too much of your capital at stake on a single trade, even during a losing streak.
Stay aware of upcoming economic announcements or events that could significantly impact market volatility. Consider reducing your trading activity or tightening your risk parameters during such periods to avoid unexpected losses.
Consider using trailing stops to lock in profits as the trade moves in your favor. This can help you capture more gains while still allowing the trade to potentially reach your take profit level.
Periodically review your trading performance and risk management strategies. Adjust your risk parameters if needed based on your trading results and evolving market conditions.
Remember that even with a solid risk management plan, losses are an inherent part of trading. The goal of effective risk management is to ensure that a series of losses does not wipe out a significant portion of your trading capital, allowing you to continue trading and potentially benefit from profitable trades in the long run.
Aug 18 2023
After reading this, I tried implementing it in my real account. Even though my capital is small, it has had a significant impact on me due to consecutive losses. Now, I'm returning here to reread it to see if there's anything I missed or didn't understand.
One of the reasons for my many losses is the occurrence of numerous false signals. When I enter trades following the trend, the price doesn't always reach the take profit level; instead, it reverses, triggering the stop loss. This hasn't happened just once or twice but multiple times. How can I avoid these false signals?
Aug 18 2023
Experiencing consecutive losses and encountering false signals can be frustrating and challenging, especially for traders who are new to the markets. Dealing with false signals is a common issue in trading, and there are a few strategies you can consider to help reduce their impact:
Confirmation Indicators: Consider using additional indicators to confirm the signals generated by the EMA20 strategy. For instance, you can use the Relative Strength Index (RSI), Moving Average Convergence Divergence (MACD), or Bollinger Bands as mentioned earlier. When multiple indicators align and provide confirming signals, the likelihood of false signals decreases.
Higher Time Frame Analysis: While you're scalping on the 5-minute chart, it's a good practice to also analyze higher time frames, like the 15-minute or 1-hour charts. Higher time frames provide a broader view of the market's trend, and the signals on these time frames are generally more reliable. If the higher time frame confirms the direction you're considering on the 5-minute chart, it can increase the validity of your trades.
Avoid Trading During High-Impact News Events: Market volatility can spike during major news announcements, leading to erratic price movements and increased false signals. It might be wise to avoid trading immediately before or after important economic releases.
Fine-Tune Entry and Exit Points: Examine your entry and exit points. Are your stop loss and take profit levels well-placed based on the current market conditions and price volatility? Adjusting these levels can help you minimize the impact of false signals.
Incorporate Price Action Analysis: Learning to read price action can be invaluable in identifying potential trend reversals and confirming entry points. Look for candlestick patterns, support, and resistance levels, and trend lines that align with your strategy signals.
Trade Only During Specific Market Conditions: Define specific market conditions that align with your strategy. For instance, you could choose to trade only when the market is trending strongly and avoid trading when it's consolidating or ranging.
Practice Patience: Avoid the temptation to enter trades hastily. Wait for strong and clear signals that are backed by confirming indicators. It's better to miss a trade opportunity than to enter a trade that has a high likelihood of being a false signal.
Keep a Trading Journal: Record all your trades, including reasons for entry and exit. Over time, you can review your journal to identify patterns in your trading behavior and learn from your mistakes.
Aug 18 2023
This strategy involves waiting for a pullback, where the price is expected to return to the area of the resistance or support level of the EMA 20. On the other hand, I prefer using a breakout approach because I feel safe. I enter the trade when the price breaks through the support or resistance level, and set the stop loss at the nearest high or low price.
My question is, can the breakout method be used in this strategy? What are the advantages and disadvantages compared to the pullback approach mentioned above?
Aug 18 2023
Yes, you can certainly adapt a breakout approach to the EMA20 strategy, and it's important to choose the method that aligns with your trading preferences and risk tolerance. Both pullback and breakout strategies have their own advantages and disadvantages, so let's explore how the breakout method can be used with the EMA20 strategy:
Breakout Approach with EMA20:
Advantages:
Disadvantages:
Comparing Pullback and Breakout Approaches:
In the context of the EMA20 strategy, both approaches have their merits. The pullback approach focuses on entering trades when the price retraces to the EMA20 after a trend move, potentially increasing the odds of catching the trend continuation. On the other hand, the breakout approach aims to capture early momentum as the price breaks through support or resistance levels.
Your preference for the breakout approach is valid if it makes you feel more comfortable and aligned with your trading style. However, it's essential to carefully manage the risk associated with false breakouts. You can consider using additional confirmation indicators, like volume analysis or candlestick patterns, to help validate breakouts before entering trades.
Ultimately, the success of either approach depends on your ability to adapt to changing market conditions, manage risk effectively, and maintain discipline in your trading decisions. Whichever approach you choose, make sure to thoroughly test it on a demo account, evaluate its performance, and refine your strategy over time.