Today i’ll discuss an indicator called 20ema (exponential moving average) i use while riding a strong trend. Here i’m not discussing the definition of 20ema,visit HERE to find out the fundamentals of this indicator.On this article,i’ll be showing you the importance of 20ema & how i use it in my everyday’s trading.Depending on the latest price action, 20ema will constantly change & so it’s also called dynamic support & resistance.At the end of the article i’ve attached a video presentation to show how to place this indicator on charts.
As i stated earlier, I use 20ema only when price is trendy & never use it in flat market.Have a look at below chart – it shows both flat & trendy price actions going on.So first thing you must understand the difference between trendy & flat market.
Once a trend is defined we can start looking for 20ema as our potential support/resistance level to join the trend momentum. In an uptrend, price will always be above 20ema & in a downtrend price will always be below 20ema.Pls note: many traders think in a opposite way like : “if price is above 20ema it’s uptrend & price is below 20ema is downtrend” – this concept is totally wrong & can destroy your account.20ema does not define a trend hence we must not define trend looking at ema direction.To define trend you must use pure price action momentum(i’ll cover this topic “how to identify a trend using raw price action” in my next few articles).On above chart, you can see price was jumping above & below 20ema for a longtime but still we can identify the trendy momentum & the flat market momentum using raw price action only.If we would use 20ema here to identify the trend,we would have considered the flat market/flat price momentum as uptrend or downtrend which would be totally wrong. AND the entire concept on following 2oema is true for any other moving average you use.Finally We should not use 20ema as a trend decider in market but to join an existing trend we will use 20ema areas as possible entry areas in market as i shown in below examples.
In an UPTREND – In below chart we see a strong uptrendy market got 6 times rejection from 20ema area & ended the move with huge upmove. So once you see a trend is up,you job is to wait for a price pullback towards 20ema & hunt a buy signal using the price action patterns. traders trying to sell this market will not even exist in the market at the end of this uptrend ! We heard lot of times – “Trend is your Friend” & you can see the reason below.
In a DOWNTREND – In below chart we can see a strong downtrendy market got 4 times rejection from 20ema area & ended the move with huge sell-off.So once you see a trend is down,you job is to wait for a price pullback towards 20ema & hunt a sell signal using the price action patterns. “TRADE the TREND only & never go against it” is the secret of successful trading.
In below chart, we can see some INSIDER BAR formation boxes (read how to trade inside bar HERE)formed while price was shooting up followed by a strong uptrend & a sustained move above 20ema for a longtime.The stock is so strongly trendy that it didn’t even touch 20ema properly & when it came near 20ema it formed another price action buy signal by forming PIN bars there & kept the bullish momentum intact.So this chart is a classic example of hunting buy signals when you see price trading strongly above 20ema.
Now I’ve chosen this chart example below to show you the difference between a buy signal & a sell signal from 20ema when price is trendy.In chart,a bullish PIN formed(read HERE how to trade a PIN bar) on 20ema while price was strongly making a bull run with higher high & higher low & finally price pushed on the upside after the buy signal.The opposite is true in case of the formed bearish PIN bar sell signal.This PIN is formed with a background of lower low & lower highs(a bear trend) & accordingly showed a large sell-off thereafter.
I’ll show you some examples of 20ema trading in international markets( GBPUSD & S&P500) below :
Price is rejecting from 2oema here in a strongly downtrendy market :
S&P500: Price is bouncing up each time it tests 20ema area in a strongly uptrendy market
NOW below i’ve attached a video presentation & i’ve shown there how to place 20ema on charts i use.In case you do not know the charts i’m using pls click here to read the article regarding charts i am using & check out installation & setups.
Some more topics are important to understand to trade this powerful indicator (2oema) properly which are broadly discussed in my training session with the students/members :
What the market is doing when the 20 ema is flat
What the market is doing when the slope is up AND how STEEP that slope is
What the market is doing when the slope is down AND how STEEP that slope is
What happens to price when the 20 ema acts as resistance
What happens to price when the 20 ema acts as support
How price reacts around the 20 ema
What happens when the 20 ema is broken
What happens to price when it is stretched away from the 20 ema
Reading price action around 20ema
When not to trade 20ema even it’s a right setup
……………………….. & many more !!!!!!!!!!!!!!!!
Hopefully i was able to give you some brief ideas about importance & usage of 20ema & how it can make a lot of money for us.