Bounce Trading Strategy with EMA and Bar Chart

This is a short-term trading method that specifically uses bar charts as opposed to common candlesticks. Let's learn how to combine it with EMA to generate trading signals.

In the world of trading, there are many strategies that can be used to achieve desired profitability. The bounce trading strategy that uses bar charts and Exponential Moving Averages (EMA) is one of them.

Briefly, the bounce trading strategy is a method that uses price bounces. This strategy utilizes the EMA's ability to identify strong dynamic support and resistance levels and combine it with bar charts' simple visual to determine entry and exit points.

Why Use EMA and Bar Charts?

Typically, this technique uses a small time frame and one type of Exponential Moving Average (EMA) to give more weight to recent price movements. EMA does have an advantage over other types of Moving Averages such as Simple Moving Average (SMA) and Weighted Moving Average (WMA). This is because EMA is much more responsive and suitable for various trading techniques, including the bounce strategy.

Meanwhile, this strategy uses Bar Charts due to its advantage in presenting a complete price data (OHLC) with simpler visuals. Unlike candlestick charts, bar charts are not filled with bearish and bullish colors, thus allowing traders to focus on the price bounce and capitalize the opportunities easier.

How Does the Bounce Strategy Work?

The EMA indicator can help traders show the overall direction and trend of price movements, creating a smoother-looking price line. When the price undergoes a strong movement, the line will jump before continuing its movement in the original direction. The strategy will use this bounce as an opportunity to enter a position.

For the basic setup, traders can use a bar chart on a 1-minute to 5-minute time frame and an Exponential Moving Average period of 34 (34 EMA).

Then, what about the target profit?

As reported by The Balance, this strategy can and should be used with an estimated target profit of 10 pips and a stop loss of 5 pips.

1. Open a Bar Chart

2. Add the 34 EMA

3. Observe How the Price Moves around EMA

Wait for the price to move away from the EMA. There is no standard distance that the price must reach, but the farther the better. For this example, the distance used is about 10 pips.

Next, you need to be cautious when the price reverses and starts to move back toward the EMA line.

4. Wait for the Price to Touch EMA

To confirm the signal, the price must touch the EMA line before bouncing. For a buy trading scenario, the price bar should have made lower lows when approaching the EMA. Conversely, a sell trading scenario would require the price bar to make higher highs when approaching the EMA.

There is no specific number of bars to measure the lower low and higher high. However, it is highly recommended that traders wait for at least three lower lows and higher highs. The chart below shows that the price only touches the EMA after forming three consecutive lower lows.

5. Set an Entry Trade

To enter a buy position, follow these guidelines:

• Price bars make lower lows.
• A bar touches the EMA line.
• The next price bar fails to make a new low.
• The bar breaks the previous high.

As for sell positions, follow these guidelines:

• Price bars make higher highs.
• A price bar touches the EMA line.
• The next price bar fails to make a new high.
• The bar breaks the previous low.

6. Exit the Trade

The next important step is to determine the exit scenario. Traders could use the bouncing bar's low as the main reference to set a stop loss. For a winning scenario, a risk/reward ratio is needed to place a profit target so traders can maintain good profitability in the future. If you use price action, look over the previous key resistance to determine a good take profit level.

Traders can also utilize a trailing stop if the trend is strong enough to continue further.

Before applying this simple strategy to your real account, it's highly recommended to perform backtest and forward test on a demo account. After all, not all traders could apply the same trading strategy and yield the same success.