Trading in the direction of the trend is one of the simplest ways to improve your odds. Two moving averages are enough to tell you which direction that is.
What an EMA is
An exponential moving average (EMA) is the average price over a number of candles, with more weight given to recent candles. The EMA 50 follows the shorter-term trend; the EMA 200 shows the longer-term one. On our H1 chart, that is roughly the last two days and the last eight trading days.
The three states we use
| State | Condition | What it suggests |
|---|---|---|
| Uptrend | Price above both EMAs, and EMA 50 above EMA 200 | Look for buys at support |
| Downtrend | Price below both EMAs, and EMA 50 below EMA 200 | Look for sells at resistance |
| Sideways | Anything else | Reduce size or wait |
Use it as a filter, not a trigger
The EMA state does not tell you when to enter. It tells you which side to look at. Combine it with the other lessons:
- Check the trend state.
- Mark the pivot levels on the trend side (PP and S1 in an uptrend, PP and R1 in a downtrend).
- Wait for a confirming candle at the level.
- Place the stop beyond the level and size the position from it.
- Check that the reward-to-risk is at least 1 : 1.5.
Moving averages lag. They are built from past prices, so they confirm a trend after it has started and keep pointing the old way for a while after it ends. In a range, price will cross them back and forth. That is why "sideways" is a valid answer and often the right moment to do nothing.
Common mistakes
- Entering just because price crossed an EMA.
- Fighting a clear trend because price "looks too high".
- Changing EMA settings after every losing trade.
Key takeaways
- The EMA 50/200 tell you which side of the market to favour.
- Sideways is a signal to slow down.
- Trend, level, candle, risk: in that order.