20 EMA and Patterns

[brownsfan019 16]

In this thread, Bearbull posted a neat little chart that is more appropriate here.

 

The premise is simple...

 

Experiment with say 15min or 30min chart and a EMA of 20 and focus on just two setups, a hammer in an uptrend at the moving average and a three bar reversal pattern (downbar, inside bar , followed by an upbar, ie. Harami setup, infact if you learn to blend them , you realise that the setup turns out to be a hammer

Similarly focus on an inverted hammer in a downtrending moving average

You could even try this out on 10min chart.

 

And the chart that followed the post:

 

 

It's an interesting trading idea that I thought could get some life here. I'll invite Bearbull over to comment more.

 

A few charts that caught my attention using the same idea:

 

 

 

 

 

 

* IMO the yellow highlighted one above would be the primo setup - a pullback to the 20 EMA after a move and an immediate rejection.

 

 

=================

 

Is there potential here for a very tradable system? Perhaps.

 

Items to consider:

 

* Entry is only part 1 of the equation, need an exit strategy.

* This may or may not be an all day trading system. There needs to be some movement for this to be viable IMO.

* Rules of entries could be flexible as some I have highlighted above or more strict like the one highlighted in yellow.

* Chart timeframe can make a big difference as well - minute chart, tick charts, volume charts - all could be viable options here.

Edited September 15, 2008 by brownsfan019

[OAC 10]

You forget the other component of this popular set-up which is ADX>30.

When Dogpile was around, a lot of his set-ups were along this line.

Palin influence ? No, LBR influence, Trader with lipstick.

She also has a set-up called short-skirt which is also a pullback set-up similar to the one above. Hey she named it, I didn't.

[james_gsx 16]

I frequently use the 21 EMA, which I won't lie I got from John Carter.

 

The biggest issues I can think of off the top of my head would be money management, exits, and even entries. You could use pulbacks, but that is often more difficult in real time then it appears in hindsight - but that could just be me.

 

Also, price will sometimes hang around and chop near the 20EMA. So money management would be key or you could get stopped out fairly easily. You could make a counter trend setup, for example a hammer that's "far away" from the EMA and make the 20 EMA your target.

 

Overall, I think using the 20EMA with a simple oscillator like a stochastic could be a simple strategy on say the 15 minute chart.

[Bearbull 10]

It does not matter one iota which MA you use and who employed it first, the whole point is about concepts, to read the setup via candlestick pattern in terms of context.

One could draw a trendline or a moving average or both. Then wait patiently for the setups in an uptrend and vice versa, experiment with this, work out the risk/reward ratios, test it thoroughly, see if it gives a trader a consistently profitable approach, if not then by all means add ADX and so on. The primary message was to avoid attaching meaning to every hammer, engulfing bar , gravestone doji etc:)

However if anybody disagrees, fine, lets keep this civil and constructive, we know it is the most easiest thing in the world to criticize but then one should be prepared to post something which substantiates that and top it up with a positive contribution which will enhance the value of the thread and the forum.

[Kiwi 16]

I'm a little annoyed BB. You and BF are giving away my trading method.

 

FWIW I got the 21 ema (and never forget the mystically effective 34 ema) from an old guy who got it from another guy who'd been trading the ema zone since Linda BR and John C were just twinkles in their parents eyes.

[brownsfan019 16]

Hey guys,

Thanks for participating. I will keep the thread clean and on point. Over here I can magically delete any posts that are off topic.

 

The premise behind the trade plan is simple, yet will require work for anyone serious in using it. For me personally, I have found that EXITS are the most difficult thing for me. I have plenty of entry methods. When/where to exit is what can drive me nuts for days.

 

Feel free to post your own version of the EMA premise - 20, 21, 34, 28.627, I don't care.

[brownsfan019 16]

Here's a failed one that just occurred:

 

 

 

This one was a solid setup that just didn't work. Depending on how you entered the trade, about a 1.5-2pt loss. It appears that ones that work can move a substantial amount, so if the money management was good, no biggie on the loss.

 

It comes back to how you exit. You can lose 2 here if the winners are +4 or more for example. You can even get +2 if your winning % is over 50%.

 

So many ways to work the #'s and the system.

 

Maybe BB, Kiwi or Gsx can chime in and give some ideas on how you might exit trades using this setup.

[brownsfan019 16]

Here's another:

 

 

 

So this one has/had potential depending on exit strategy.

[brownsfan019 16]

So far this price action today is one where having fixed targets to exit is looking good so far. Very jumpy action so far this morning.

[brownsfan019 16]

This thing popped for anyone that was in it and riding it out:

 

 

[brownsfan019 16]

 

 

Could be shaping up to be a thrust up, pause, repeat. I personally was long on a different setup and exited at 31.75. We'll see if this is one that just goes up all day or if some sort of exit/scaling was necessary.

 

If nothing else, 2 possible trades today on this setup and 1 loss, 1 winner. Winner greatly outperformed the loser and that's about all we can ask for.

[james_gsx 16]

Here is something I frequently see. Two things typically happen, you get a good signal and price retraces to the 21 EMA. Or, price moves sideways until the EMA "catches up". So depending on your system, you can either get a trading signal or a signal that tells you to get ready.

 

 

It's about to happen on the 5min right now, so we'll see how it plays out. I also threw in a basic stocastic, since I know that can be useful in trading. I would like to see the stocastic level out around or a little below. Couple that with support on the 21 EMA and you have a nice signal.

 

 

[Bearbull 10]

BF,

The initial post was in response to RobinHood's inquiry as to the validity of employing candlestick charting on an intraday basis. As he had only used them on EOD analysis, the two simple setups i.e hammer and a 3bar reversal pattern in an uptrend via MA or trendline or both were pointed out as a starting phase to observe and acquire knowledge via research whether or not they provide acceptable level of predictability. The next phase would involve working out the tactics , i.e entry, exit, trading rules, money management etc , this depends entirely on the individual risk/reward tolerance but all this has to be worked out and tested and obviously requires considerable effort and patience as you already are aware I am sure. you might only get one or two setups a day, sometimes not at all, patience is not easy to implement.

 

Only after that one can proceed to introduce other tools such as blending of candles, pivots, support/resistance, vol etc. and again proceeded by thorough testing along each step of the way.

 

Also I would suggest to undertake the exercise initially on market hours price action only- pre market can be quite tricky especially just before the open where there is a tendency to move the prices the opposite direction to the true intentions.

 

In your chart you showed an entry at a doji, which was premarket and which reflects indecision compared to a hammer or a dragonfly. The second entry again is not a hammer in the strictest sense, large tail/small body, however if you blend that with the the second candle(the second arrow on the attached) then it is close to a true hammer, however that takes place in the 2nd stage of the exercise.

 

As to the entry/exit, this gets into the field of tactics and really there are numerous ways of managing a trade as in any other methodology.

for example: Entry could be on the close of the bar or the bar following the hammer if the close is above the high, here again should one wait for the close of the 2nd bar or should the entry be as the price moves up through the high of the hammer -- all of this has to be up to the individual and has to be tested out.

 

As for the exit: again it can be a fixed target or if trading say 2 contracts, take 1 off at a fixed target and trail the second (where and what distance - again tactics),

The first target can be the previous swing high (in case of a long trade and vice versa on a short), the second trailing under each bar that moves in the required direction, avoiding any inside bars or doji where it is likely to be hit and then the trader would be sitting there observing the price moving back up again:)

Moving of Stop: the initial stop would depend on the timeframe, here again so many ways of playing, the stop moved to breakeven after the price moves a certain distance etc.

 

As we are dealing with trend it is imperative to stay with one timeframe, later on if we get into playing support and resistance, then ofcourse it becomes a new ball game.

[Bearbull 10]

Forgot the arrows.

 

Yes all the filtering process via other indicators such as ADX, stochastic RSI , CCI , multiple time frames etc comes later , however as I have mentioned my initial intention was to point out to Robinhood 2 simple setups to experiment with and test out.

[james_gsx 16]

Looks like the retracement on the 15min worked out well. Now, to figure out a consistent setup

 

 

 

[james_gsx 16]

That candle turned into a spinning top (if thats what you want to call it), from there the ES moved 10pts to 1230 a nice profit for sure. the real issue would be exits. On a volatile day like today, I would say 10pt move is reasonable for a 15 minute chart. But obviously, that's not very realistic for everyday scenarios.

 

Some possible ideas

 

1 - Use the stochastic, wait for an "oversold" signal with a small body candle

2 - Preset profit, i.e - 5pts.

3 - a % of the recent high. The previous high was 1240, the trade was around 1220 - so you could say a 50% retracement or 1230.

 

Any other thoughts? Something like this could turn out to be a simple trade to let play throughout the day.

 

[brownsfan019 16]

Good stuff guys! Another solid thread in the CC.

 

Quality over quantity in this part of the forum.

 

[brownsfan019 16]

this depends entirely on the individual risk/reward tolerance but all this has to be worked out and tested and obviously requires considerable effort and patience as you already are aware I am sure. you might only get one or two setups a day, sometimes not at all, patience is not easy to implement.

 

That's probably the most important part of the entire process when using a setup that may not show up often. I'm glancing at the charts and other than that 1 long (or 2 if you take the one I looked at), that's about it for the day so far IMO.

 

1 or 2 trades and done or watching and waiting patiently.

 

My guess is some would struggle w/ that and want to trade even though the setups may be solid.

[trader273 10]

Here is another way to view pullbacks as well.

[brutusdog 10]

this is where i first came across this.

 

http://www.trading-naked.com/FloorTraderMethod.htm

 

has provided the basis of a very solid strategy for me. stalking retraces is low risk high reward trading.

[Bearbull 10]

That's probably the most important part of the entire process when using a setup that may not show up often. I'm glancing at the charts and other than that 1 long (or 2 if you take the one I looked at), that's about it for the day so far IMO.

 

1 or 2 trades and done or watching and waiting patiently.

 

My guess is some would struggle w/ that and want to trade even though the setups may be solid.

 

Precisely, that is where all that talk about discipline and consistency comes into play.

As per DbPhoenix's excellent definition of an Edge "An edge is the knowledge proved through research that a particular price pattern or market behavior offers an acceptable level of predictabiity and risk to reward to provid a consistently profitable outcome over time"

 

Once the strategy, tactics, trading and money management rules are in place, adherence to the trading plan based on that is of paramount importance if consistent success is desired.

 

Ofcourse there is also much merit in the Power of Quitting after a certain level of profit has been extracted or after a certain % loss, the river will be running tomorrow;)

[OAC 10]

Believe it or not. Price action around 5-min and 15-min 20EMA and the Bollinger Band during early hours can be your clue to whether or we may have a Trend Day.

[brownsfan019 16]

Here's one from today that I would consider:

 

[brownsfan019 16]

Believe it or not. Price action around 5-min and 15-min 20EMA and the Bollinger Band during early hours can be your clue to whether or we may have a Trend Day.

 

I'd love to see a thread about that OAC!!! Feel free to start in the Candlestick Corner and I will make sure it stays on track.

[Bearbull 10]

Here's one from today that I would consider:

 

 

Yes indeed, with pivots (S2 at 1226), previous support , now resistance and the volume it becomes a high probability trade., emphasize probability, not certainty;), drill down to lower time frames and it gets better, but now we are getting far ahead of the initial exercise, wonder if Robinhood is paying any attention, afterall he started it all;)