How to use 200 EMA as a simple but powerful strategy? Despite its common setups, there are good trading opportunities to find if you can utilize 200 EMA properly.
As a trader, ing a suitable and effective trading strategy is definitely not the easiest task. Many traders like to jump around while trying different strategies and end up quitting. If you're still unsure about which strategy suits you best, you might want to try the 200 EMA trading strategy. Compared to other strategies, it is relatively easy to learn and use, making it suitable for both beginners and professionals.
Basically, Exponential Moving Average (EMA) is one of the most commonly used indicators in forex trading. Like other MA types, EMA is a customizable indicator, meaning that traders can freely choose their periods. The shorter the period, the more sensitive the indicator line to price movement. In contrast, the longer the period, the less sensitive the results are.
200 EMA is one of the most well-known EMA periods to use in the forex trading strategy because it is quite simple and has the potential to tell many important price information.
Besides, this strategy is definitely worth noting due to the psychological effect that can occur in the market's price movements around the 200 EMA line. This article will explain how to trade with the 200 EMA trading strategy along with its advantages and disadvantages.
How to Trade with 200 EMA Trading Strategy
As the name implies, the 200 EMA trading strategy is based on the Exponential Moving Average set with a period of 200. The 200 EMA is a long-term indicator, which means it will help you identify and trade with the long-term trend. The basic trend principle to remember is to buy low and sell high. Also, if you are able to spot major market movements, 200 EMA will help you execute positions based on large swings.
The first step is to set the chart with the 200 EMA. Note that this trading strategy is a multi-time frame one, so in this case, you will need a daily chart, 4-hour chart, and 1-hour chart.
Now that the 200 EMA is already set, you should identify the trend in the daily chart. Basically, the main principle is that if the price is below the 200 EMA line, then it is a downtrend. The steeper the EMA slopes, the stronger is the trend. On the other side, when the price is above the 200 EMA line, then it is an uptrend. In this case, the daily chart is used to identify the main trend.
The next step is to confirm the trend in the shorter time frames. Now shift to the 4-hour chart and see where the 200 EMA is relative to the price. In this case, you would want to look for the 200 EMA correlations with the daily chart. If you can see that there is a clear correlation, switch to the 1-hour chart and repeat the process.
Make sure that the 200 EMA has the same trend as in the two previous time frames. If the correlation is present in all three time frames, then it is a good time for you to open a position in the 1-hour chart. Also, make sure to use the principle of buy low and sell high as we have previously mentioned.
In trading with three charts simultaneously, remember these two rules:
- If the trend in the 1-hour chart is different from those on the daily and 4-hour charts, you should just wait for the trend to shift and turn in the same direction.
- If the case is that the trend on the 1-hour and 4-hour charts are in the same direction but the daily chart tells a different story, then the same principle applies. You should just wait and be patient until all the time frames show the same trend. Or you can just use the 4-hour and 1-hour charts as your guide. Just make sure that you're not overtrading.
As an addition, you can add stochastic with a setup of 14, 3, and 5 to your chart. The stochastic indicator is essentially used to identify oversold and overbought conditions. In this case, when the stochastic levels hit 80, that means too many traders have invested and the prices are more likely to move lower. On the other hand, if the stochastic levels are below 20, then that means the market is oversold and the price will likely bounce in the future.
Therefore, remember to sell only if the price is in the downtrend and the stochastic is above 80. Meanwhile, consider going Long only if the price is in the uptrend and the stochastic is below 20.
Key Principles in the 200 EMA Trading Strategy
Here are what you need to understand in using 200 EMA trading strategy:
- As soon as the trend correlates in all time frames (daily, 4-hour, and 1-hour charts), you need to trade the pullbacks from the 200 EMA.
- The best way to enter the trade with the 200 EMA trading strategy is by using price action and reversal candlesticks.
- Once you confirm the reversal candlestick patterns, place a pending stop order just 3-5 pips below the low of the bearish reversal candlestick if the trend is downward and you are selling). Either way, place a buy stop just 3-5 pips above the high of the bullish reversal candlestick if it's an uptrend and you are buying).
- Set the stop loss around 10-15 pips outside of the 200 EMA line.
- Use the previous swing on the 1-hour chart to determine the take profit level.
- To manage your trade and keep it profitable, use the trailing stop which allows you to move your stop loss as your trade moves in favor of the market so that you can lock your profit proportionally.
Based on the explanation above, we can conclude that the 200 EMA trading strategy is easy to learn and use, both for beginners and professionals.
However, because it uses past price movements, the Exponential Moving Average is not always accurate. In some cases, it can give traders false signals. Hence, just like any other forex trading strategy, the 200 EMA trading strategy also has its drawbacks and sometimes things just don't go as planned.
But the fact that you're using three different timeframes (daily, 4-hour, and 1-hour charts) to confirm the validity of the trend making it possible to reduce the possibility of getting false signals from the chart. Also, because you are trading in the same direction as the trend, your odds may increase exponentially.
In the end, with a little practice (that would be better performed in a forex demo account) you will see that this simple strategy is quite powerful in its own way and definitely worth checking out.
If you are interested in exploring other strategies involving EMA, the 3 Bar EMA strategy is also quite popular for its detail in utilizing the price action for more confirmed signals.