What is an EMA trading strategy?
EMA trading strategy represents the exponential moving average strategy where the main goal is to define the main trend in the market. Using EMA indicator traders can define the predominant trend in the market, define support level for BUY trade, and define resistance level for a SELL trade. The most used exponential moving average is EMA200 on the daily chart time frame.
What does the 200ema represent?
200EMA on a daily chart represents the exponentially weighted moving average for the last 200 days (periods). This averaging price method acts more significantly to recent price changes than a simple moving average (equal weight moving average). 200 EMA indicator on the daily chart announces long-term trends and usually when a stock (asset) price crosses 200 MA or 200 EMA it is assumed that the trend has changed.
Foreign exchange (Forex) traders use the 200 exponential moving average (EMA) and the stochastic indicator for their scalping strategy. If the price is below 200 ema, the forex trend is down, and if it is above 200 ema, it is considered an upward trend. The stochastic indicator is used to determine oversold or overbought market conditions. For this indicator, when the stochastic levels exceed 80, too many traders have invested, and prices are likely to decrease. If the stochastic indicator decreases below 20, the forex market is oversold, and prices will likely increase in the future.
Using 200 EMA and stochastic indicator for forex trading – Stochastic pullback strategy
200 EMA and stochastic indicator trading strategy is a trend trading strategy where orders are generated after a pullback. While the 200 EMA moving average represents an indicator that shows the following, the stochastic indicator determines the moment to enter into a trade. BUY order will be generated if the main trend is uptrend moving above the 200 EMA value, while the stochastic indicator is below 20. SELL order will be generated if the main trend is downtrend moving below the 200 EMA value, while the stochastic indicator is above 80.
Trading parameters
This scalping strategy can be used for any currency pairs. The time frames can vary and should be preferably more than 5 minutes. The 200 ema and stochastic are the main Forex indicators used. Users of the MT4 forex trading platform will find that the stochastic indicators are the default setting.
Prepare:
1. EMA 200 indicator on the chart
2. Stochastic indicator (oscillators)
3. Download Fibo expansion Indicator Mt4
BUY rules:
BUY if the price is above 200EMA, AND the stochastic indicator is below 20.
The trend is bullish.
Stop loss and target are defined as buying Fib. Levels using the auto Fib indicator.
The trader should only buy the Forex prices in an uptrend moving above the 200 ema value. Simultaneously, the stochastic indicator should have declined below twenty and is now increasing in value. If these conditions are met, the trader can place a buy order when the candlestick closes.
SELL rules:
SELL if the price is below 200EMA, AND the stochastic indicator is above 80.
The trend is bearish.
Stop loss and target are defined as buying Fib. Levels using the auto Fib indicator.
After noticing a downtrend in the market, the trader should sell with prices below the 200 ema indicator level. He should also confirm that the stochastic indicator value checks whether it has exceeded 80 and is now reducing. If both these conditions are satisfied, the trader should immediately place his order for selling when the candlestick closes.
BUY trade example:
On 5 minute chart, the price is above EMA200, and stochastic is below 20. Stop loss is 50 Fib. Level and targets are 76.4% and 100% Fib. Levels.
Disadvantages of the stochastic, 200 ema indicator, scalping strategy
This strategy is not effective when there are no trends; the market moves sideways since many false signals are generated. The stochastic indicator oscillates between extreme values. Traders will find that they face the problem that the trend is powerful, yet the stochastic indicator gives an inaccurate signal.
Advantages
The 200 Ema indicator helps detect the trend, and the stochastic indicator is useful for measuring how strong the trend is. Since two indicators are used, it is safer to purchase or sell Forex. For additional checking before placing forex trading orders, candlesticks for forex reversal can be used to confirm the right point to enter a forex trade.
