Trading The 50EMA Zone
Today’s Trading Tip has 2 parts:
1. Use the 50EMA.
Specifically: The 50 period moving average, calculated exponentially on the close price. The 50 is one of my favourite mathematical indicators. I overlay it on basically all my charts.
Understand that MA’s are not magic, and there is no combination of MA’s that produce certain profits like many beginners hope. EMA’s fail from time to time, and where they once respected by the market, they will be eventually broken.
Therefore, an EMA, by itself, is not a valid trading plan! Even a double or triple EMA crossover cannot possibly constitute a sound trading strategy. There are so many more components that go into a trading plan to make it profitable.
For example, even IF you found an EMA crossover system (one of the most common strategy styles for newbies) that recorded an 80% strike rate… you would STILL fail as a trader if you don’t understand risk management and random distribution.
Professional traders use EMA’s simply for their dynamic support/resistance qualities. When the market reaches the 50EMA within a trend, price is often rejected, and the start of the next phase begins. When combined with deceleration, candle stick analysis, manually drawn key S/R lines and price action patterns, we can use all these confluence factors to identify high probability entries…
This brings us to point 2…
2. Think of them as ZONES rather than LINES.
As with all S/R levels, think of them as zones, rather than hard concrete lines.
By putting an imaginary line above and below the EMA, trend line or horizontal support line, you will create a “zone” of resistance, where the true power is.
- Sometimes, the market doesn’t quite reach the line!
- Sometimes, it pokes its head just over it!
This is still a valid rejection! There is no perfection in the market. Sometimes we see a bounce “to the pip”… but this is quite rare!
PRO TIP: For day traders, the 50 EMA on the 1H chart is one of my secret weapons. Trading the daily reversal as a 50EMA break and retest on the 1H chart is how I primarily enter positions to this day.