There are many EMA periods to choose from when it comes to the crossover strategy. But what are exactly the best EMA lines if you're an intraday trader?
Buying and selling any financial asset during the same trading day is what is meant by the term intraday trading. Intraday traders attempt to benefit from the ever-changing price in order to capitalize on the fluctuations that occur during the trading day. Trading in this manner can always be profitable, regardless of whether a person is a seasoned trader or just starting out in the market.
One of the most used strategies in intraday trading is EMA (Exponential Moving Average) crossover. But before we can even begin to comprehend what an Exponential Moving Average is, we need to have a fundamental understanding of what a Moving Average is. A Moving Average is a form of indicator that is used to examine price data over a certain period of time by constructing a line graph that represents the average price.
The most recent prices on a chart are given a larger amount of weightage or importance when calculated using an Exponential Moving Average. When the number of periods in the EMA is reduced, the indicator places a greater emphasis on the most recent prices
An EMA crossover occurs when the two EMA lines pass over each other and get intersected in the process. If you want to be successful with this crossover technique, you need to make use of not one but two separate EMAs. This is due to the fact that this is the only method by which they may construct two distinct lines with differing weights.
Best EMA Crossover for Intraday Trading
Now that we've understood what EMA crossover and intraday trading actually are, let's move on to the best EMA crossover strategy for intraday trading. As we already know, an EMA crossover involves using two EMA lines. In this case, these would be the 8-EMA line and 20-EMA line.
See Also: Best EMA Crossover for 5-Minute Chart
The shorter EMA, the 8-EMA, is also known as the faster EMA. Whereas the longer EMA, the 20-EMA, is also known as the slower EMA. The 8-EMA uses lesser data points which is why it's faster and closer to the current market price. The 20-EMA uses more data points which is why it's slower and further from the current market price.
Now that we've figured out which two EMA lines form the best EMA crossover strategy, we're going to be looking at both a BUY and SELL scenario involving this strategy to better understand how it actually functions in the trading markets.
The Buy Setup
A buy trade is when you enter a trading position in a long trade. You do this when a bullish crossover takes place. In order for a bullish crossover to take place, you have to wait for the two lines to crossover when the market is trending in the upwards direction. More specifically, the shorter EMA or the 8-EMA has to crossover above the longer EMA or the 20-EMA.
Once that happens, we can enter the trade. To know when is the right time to close this position, you have to wait to see when the lines crossover again in a downtrend. More specifically, when the 8-EMA crosses below the 20-EMA. Once this happens, you can safely close your trading position.
See Also: How to Know When a Trend is Ending
The Sell Setup
A sell trade is when you enter a trading position in a short trade. You do this when a bearish crossover takes place. In order for a bearish crossover to take place, you have to wait for the two lines to crossover when the market is trending in a downwards direction. More specifically, the longer EMA or the 20-EMA has to crossover above the shorter EMA or the 8-EMA.
Once that happens, we can enter the trade. To know when is the right time to close this position, you have to wait to see when the lines crossover again in an uptrend. More specifically, when the 20-EMA crosses below the 8-EMA. Once this happens, you can safely close your trading position.
Benefits and Drawbacks of This Strategy
Every trading strategy has its pros and cons. While this is the best EMA crossover strategy for intraday trading, it is no exception. Let's take a look at some of the top benefits and drawbacks of using this strategy in order to better understand if this is really for us:
The biggest benefit of this strategy is that traders have reported it to work pretty well. It is actually proven to be a profitable trading strategy under the right market conditions. What's great about this strategy is that there really isn't much to it. The EMA indicator is pre-installed on most platforms and intraday trading is also a popular trading style. There is nothing that is stopping you from performing this strategy.
Like any trading strategy, you can't guarantee perfection. Even though this strategy is proven to be profitable, that is only under ideal conditions. When the market is not trending, the crossover won't work that well. The best tip we can give you is to test out any strategy on a demo account before attempting it on a real account.