Instead of relying on the Moving Average crossover, this day-trading strategy seeks to find buy/sell signals based on price actions around 50 and 200 EMA.

The Moving Average is the best and simplest tool for traders hoping for a short-term profit with a trend-following approach. As one of the most well-known technical indicators in the world, Moving Averages serve as the foundation for numerous trend-following tactics.

For this day-trading strategy, we apply 200 and 50 Exponential Moving Averages (EMAs) on the 4-hour charts. Instead of relying on the Moving Average crossover, we seek to buy/sell right after the trend is detected and exit on a profit right away.

 

Chart Setup for Day-Trading

The foundation of this day-trading strategy is 200 EMA and 50 EMA that are applied to closing prices on any 4-hour charts. Trends are well-represented in this time frame because the H4 chart interval closely follows the D1 charts.

After setting up the chart, we have to determine the current market bias according to the following criteria:

  • When the 50 EMA has just crossed below the 200 EMA, the market tends to go bearish, and we should look to sell.
  • When the 50 EMA has just crossed over the 200 EMA, the market is likely to move in favor of the bulls, and we should look to buy.

Following the trend identification, we have to wait for the buy or sell signal to show up.

 

Signals to Buy and Sell Based on the 50 and 200 EMA

The sell signal must meet the following criteria:

  1. Prices must be trading at 50 EMA or lower.
  2. Within the 200 and 50 EMA, prices must first establish a low before retracing to reach a high.
  3. Mark the low point prior to retracement using the horizontal line tool.
  4. After this low is broken, wait until a new low is created and prices begin to retrace once more.
  5. Open a short position at the previous low, with a stop loss order at the most visible high above the low.
  6. Determine the take profit based on the high-low distance and then multiply it by 1.5 times the entry.

An example of this setup can be seen in the following chart:

How to Use 50 and 200 EMA for Day-Trading - SELL

Meanwhile, the buy criteria are as follows:

  1. Prices must be trading at 50 EMA or higher.
  2. Within the 200 and 50 EMA, prices must first establish a high before retracing to reach a low.
  3. Mark the high point prior to retracement using the horizontal line tool.
  4. After this high is broken, wait until a new high is created and prices begin to retrace once more.
  5. Open a long position at the previous high, with a stop loss order at the most visible low above the high.
  6. Determine the take profit based on the high-low distance and then multiply it by 1.5 times the entry.

How to Use 50 and 200 EMA for Day-Trading - BUY

 

The Benefits and Drawbacks

There is no infallible trading setup in the world. This day-trading strategy, too, has its own advantages and disadvantages.  

There are two drawbacks to employing this trading approach. First, trade set-ups don't happen very often, which may obstruct active traders who seek to gain a daily profit. Second, prices do not always retrace and continue to rise even when all conditions are satisfied. It means a wasted opportunity, but you should still follow the rules instead of arbitrarily opening new trades without proper considerations.

On the other hand, below is the list of benefits you can gain by adopting this trading strategy:

  1. It is a low-risk trading strategy because you will only enter after the trend has been established.
  2. Integrated risk management, where each trade has an ideal risk/reward ratio of at least 1:2.
  3. The average holding period can range from a few days to a week because it is based on the H4 chart.
  4. Fairly objective day-trading strategy, though finding the right buy/sell signal may take some practice.

So, will you make use of this day-trading strategy?