The Most Efficient Way to Find Options TradesThose who trade options on a whim, with no rules and no plan, will become food for Wall Street, often blowing out their accounts within months. On the other hand, successful traders spend months, and sometimes years, mastering a few strategies before risking a dime in the markets.
Take a look at another example of how the exponential moving average is quicker to react when trading technical analysis trends. In this you can see how much faster the exponential moving average reacts to the stock turning back up. The simple moving average barely moves while the stock is gaining substantial momentum upwards. The Green Line Barely Moves While Stock Gains Substantial Momentum Upwards The Best Way to Utilize the Exponential Moving Average In this article, I will show you a trading method that I created several years ago that relies on the exponential moving average indicator. Since the exponential moving average is very dynamic and responds well to recent price changes, I tend to use it to trade pullback or retracement strategies. The first thing you need to do is to adjust the exponential moving average to 20 days. The 20 day is a good starting point for most volatile stocks, futures and currency markets. If you are day trading, use 20 bars instead of 20 days. After you adjust the settings you want to find a stock or other market that’s trading substantially above the 20-day exponential moving average. The further the price is away from the average the better. You can see in this example how far the stock is trading above the moving average. This is a great filter for finding stocks or other markets that are trending strongly. You Want to Find Stocks or Other Markets That Are Rising Sharply Away from the EMA The next step is to monitor the stock or market you are trading and wait for the market to trade completely below the 20-day EMA. This example shows you exactly what I mean. You want to make sure that the high is not touching the EMA and is trading completely below it. The Stock Rallied and Within A Few Days Drops Completely Below The EMA The next step after the stock or other market you are trading drops completely below the 20-day EMA is to wait for the market to trade once again completely above the 20 Day EMA. You can see how the stock only dropped for a few days prior to resuming the strong trend, this is a good sign. If the stock was to stay below the average for more than one week I would probably be a bit concerned about continued momentum. The Move Below the Moving Average Was Short Lived Here is how the entire pattern looks like on one continuous chart. You can get a good feel for how the 20-day EMA filters strong trending markets and more importantly, how it identifies pullbacks away from the main trend. You Can See The Entire Process On This Chart Tomorrow, I will demonstrate how to correctly enter orders using this method, how to calculate your stop loss levels and how to measure your profit target as well. This is going to be a busy week so get ready to learn one of my favorite short term trading strategies. The Conclusion I hope you see why the 20 day EMA is one of the most flexible indicators for trading technical analysis strategies.