A small tutorial on how to use EMAs for gauging trend and relative strength
EMAs used
Some simple principles:
What a 100MA does, is show you the average closing price of the last 100 candles of trading. This means that if price is trading below the 100MA, we can see it as a majority of buyers being underwater.
In reality, it isn't that simple of course: we need to consider the amount of volume that was traded during each candle and inside those candles, but it helps me visualise the importance of these "magical lines".
EMA changes the formula so that more recent price action is weighted heavier than less recent price action. I found that it works better for my purposes, as it's more likely that somebody who bought yesterday will be impacted by price movements than somebody who has been in the position for 99 days (again: very simplistic example to make it easier to understand for me).
Because both MA and EMA are lagging indicators, I use H4 EMA to gauge daily trend, D1 EMA to gauge weekly trend, etc.
Trading H4 EMA
As long as price keeps bouncing at H4 trend, it's easy: buy at trend, sell at x% deviation or TA target levels.
The interesting part is when H4 trend is broken:
From here the assumption is that price will chop or range between those two EMAs. This works best in confluence with horizontal s/r levels, and personally I prefer using a volume profile as well.
When price starts reclaiming H4 EMAs, we can look at H1 timeframe to look for signs of price respecting H1 trend, which will then cause H4 to trend again etc.
If price keeps chopping around H1 and H4 EMAs, the assumption is that we are trading a range and I'll be quicker to take profits.
If price starts losing or chopping around D1 EMA 100, or constantly rejecting at H4 EMA resistance, we need to flip our mindset to trading a downtrend instead of uptrend.
To conclude
Of course this is all mostly a system to gauge strength of particular assets and get an idea of the bigger picture. If I see BTC is trending down, I will avoid looking for longs and buying dips, but will instead look to short into H4 EMA. All of this in confluence with price action and other signals you might use.
EMAs used
- white: Daily EMA 100
- green: H4 EMA 200
- dark green: H4 EMA 100
Some simple principles:
What a 100MA does, is show you the average closing price of the last 100 candles of trading. This means that if price is trading below the 100MA, we can see it as a majority of buyers being underwater.
In reality, it isn't that simple of course: we need to consider the amount of volume that was traded during each candle and inside those candles, but it helps me visualise the importance of these "magical lines".
EMA changes the formula so that more recent price action is weighted heavier than less recent price action. I found that it works better for my purposes, as it's more likely that somebody who bought yesterday will be impacted by price movements than somebody who has been in the position for 99 days (again: very simplistic example to make it easier to understand for me).
Because both MA and EMA are lagging indicators, I use H4 EMA to gauge daily trend, D1 EMA to gauge weekly trend, etc.
Trading H4 EMA
As long as price keeps bouncing at H4 trend, it's easy: buy at trend, sell at x% deviation or TA target levels.
The interesting part is when H4 trend is broken:
- Often we look for a few candle closes below trend to validate the trend break
- Underside rejection of the H4 EMA 200 confirms the idea
- From there, I keep my eyes on D1 EMA 100, expecting the gap between those two levels to be filled
From here the assumption is that price will chop or range between those two EMAs. This works best in confluence with horizontal s/r levels, and personally I prefer using a volume profile as well.
When price starts reclaiming H4 EMAs, we can look at H1 timeframe to look for signs of price respecting H1 trend, which will then cause H4 to trend again etc.
If price keeps chopping around H1 and H4 EMAs, the assumption is that we are trading a range and I'll be quicker to take profits.
If price starts losing or chopping around D1 EMA 100, or constantly rejecting at H4 EMA resistance, we need to flip our mindset to trading a downtrend instead of uptrend.
To conclude
Of course this is all mostly a system to gauge strength of particular assets and get an idea of the bigger picture. If I see BTC is trending down, I will avoid looking for longs and buying dips, but will instead look to short into H4 EMA. All of this in confluence with price action and other signals you might use.
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twitter.com/mooncakexbt
twitter.com/huskyXBT