3 EMA's System
The 3EMA's is a very simple trading strategy based on 3 exponential moving averages ( EMA ).
8 EMA , 21 EMA , and 55 EMA .
Alternative: 10 EMA , 25 EMA , and 50 EMA .
A trade is initiated on the FAILURE of the retracement that happens after the 8 EMA crosses the 55 EMA .
Why not initiate a trade when the 8 EMA crosses the 21 EMA on the very first instance?
The answer is simple: The 55 EMA line acts as support if price is above it and acts as resistance when price is below it, therefore, to make sure that price does not bounce off this 55 EMA line, the 8 EMA must cross the 55 EMA before a trade can be taken.
Timeframe: 1H and above.
Indicators: 8 EMA , 21 EMA , and 55 EMA .
Markets: Any.
Trade Entry Rules:
- Place a buy stop order 2-5 ticks above the high of the candlestick which has a lower high than the previous candlestick after the 8 EMA crosses the 55 EMA to the upside.
- Place a sell stop order 2-5 ticks below the low of the candlestick which has a higher low than the previous candlestick after the 8 EMA crosses the 55 EMA to the downside.
- If the buy stop / sell stop order is not executed then continue to move the buy stop / sell stop order above/below each new lower high / higher low that forms until the retracement fails and the high/low of the candlestick is broken and the trade is executed.
Taking Profit:
- You can use previous swing low levels as your profit target for a sell trade or previous swing high for a buy trade.
- Another option is not to have a profit target but use a trailing stop behind each lower swing high (for a short trade) as your trade moves in your favor so that you can ride out that trend for as long as you can, extracting maximum ticks out of the price swing until you get stopped out.
- Do the exact opposite for a buy trade.
Stop Loss Placement:
- For a buy order, place your stop loss 2-5 ticks below the low of the candlestick that has its high broken which then activated your buy stop order.
- For a sell order, place your stop loss 2-5 ticks above the high of the candlestick that has its low broken which then activated your sell stop order.
Trade Management:
- One of the best way of trade management is to trail stop losses behind lower swing highs (for a short trade) or below higher swing lows. This enables you to lock in profits as a trade moves in your favor until your profit target is hit or if you don't have a profit target, you can ride out the trend as far as it can go until you get stopped out.
Advantage of 3 EMA's:
- A very simple, easy to understand and use strategy.
- In strong trending markets, there is potential to make large profits very quickly.
Disadvantages of the 3 EMA's:
- EMA's are lagging indicators, therefore any trade taken based on these indicators means that you are getting into a trade after price has moved, sometimes to a great deal already so you may not be entering a trade at the right time.
- If price moves a great deal, when you enter a trade, it may be due for a reversal and this would also get you stopped out.
- This system will perform poorly in ranged markets.