Using 3 EMA lines will allow you to see a strong signal of the trend and tell you that the trend will last. Here is an example.

Three EMA Crossover Lines

To successfully ride the trend, you must be able to determine a strong trend and enter the trade as soon as you discover the trend. Most people can successfully complete the first point. However, they struggle to follow through with the second point.

This is due to the lag of technical indicators, where they will illustrate the trend as well established instead of a beginning. So, in order to avoid missing the opportunity to trade using a trend, you must simply enter the trend after you have discovered a strong signal that the trend will continue, one of which is by spotting crossover signals from three EMA lines.

Using three EMA lines will allow you to see a strong signal of the trend and tell you that the trend will last. The most popular EMA lines that traders use are a crossover of 5 EMA, 20 EMA, and 50 EMA.

It is better to use a longer time frame to trade using this strategy, such as 4H or a daily chart. The crossover will show a major trend that could last days if not weeks.

 

Using Three EMA Crossover Lines to Identify Strong Trends

Here is an example of identifying an uptrend with three EMA crossover lines. The ideal condition is when the 5 EMA line crosses over the 20 EMA and the 20 EMA line crosses the 50 EMA, all from below.

3 EMA Croosover - Uptrend
On the other hand, here's an example of three EMA crossover lines that indicate a strong downtrend:

3 EMA Croosover - Downtrend

 

Entry and Exit Rules

During a strong uptrend, make sure that you only open a buy position on these conditions:

  • The 3 EMA lines are moving up away from each other after making a bullish crossover.
  • There's a bullish candlestick closed above the 5 EMA, followed by another bullish candlestick after.
  • If the trend has been formed for some time, wait until the price makes a small retracement and bounces from the EMA lines. This is a strategy to capitalize on a pullback opportunity.
  • To close the position, wait until there's a bearish candlestick closed below the 50 EMA.

Buy

Meanwhile, you could open a sell position with the following conditions:

  • The 3 EMA lines are declining and moving away from each other after making a bearish crossover.
  • There's a bearish candlestick closed below the 5 EMA, followed by another bearish candlestick after.
  • If the trend has been formed for some time, wait until the price makes a small retracement and retests the EMA lines.
  • Close the position if there was a bullish candlestick closed above the 50 EMA.

Sell Rules

 

Pros and Cons of Using Three EMA Crossover Lines

Using three Exponential Moving Average (EMA) crossover lines in trading has its advantages and disadvantages. Let's explore the pros and cons:

✔️Pros ❌Cons
  • The three EMA crossover strategy can help identify trends in the market.
  • Using three EMAs can result in smoother and quicker signals, allowing traders to react faster to changes in market conditions.
  • As EMAs place more emphasis on recent data, they can help reduce lag in comparison to other moving average types. This can be particularly beneficial when markets experience rapid price movements.
  • Traders can adjust the lengths of the three EMAs to suit different timeframes and market conditions. This flexibility allows for customization based on individual trading strategies.
  • The use of three EMAs can still result in false signals, particularly during choppy or sideways markets. Traders may experience whipsaws, where the EMAs frequently cross each other, leading to potential losses.
  • Deciding on the optimal lengths for the three EMAs can be subjective and may require backtesting and experimentation. There is no one-size-fits-all approach, and different market conditions may demand different EMA combinations.
  • While EMAs respond more quickly than SMAs, they may still lag behind the actual price action, leading toed signal confirmations.
  • The 3 EMA crossover strategy may work well in trending markets but might perform poorly in choppy or highly volatile conditions.
  • There is no fixed stop loss or profit target when trading this way

In conclusion, the 3 EMA crossover strategy can be a valuable tool for trend identification and generating trading signals. However, like any trading approach, it has its limitations and requires careful consideration and risk management to be effectively applied. Traders should complement this strategy with other technical indicators and fundamental analysis for more robust decision-making.

See you!
Rico FY