Investors have always loved using indicators. They are useful for both day trading and medium-term investing. Unfortunately, often, instead of focusing on the underlying tool, they test too many of them. Often in such combinations that they offer conflicting signals. A good alternative to any oscillator is to observe a given instrument at different time intervals, only with an uncomplicated indicator on the chart. An effective method of using this approach is the EMA multi time frame strategy .
Tools used in the multi time frame EMA Strategy
The primary tool used in the strategy is the Exponential Moving Average . It is a weighted average, its weights vary exponentially. It is calculated on the basis of a formula that gives more weight to the current periods and less weight to distant periods. Each period has a different weight.
For example, with an EMA average of 5 periods, the price that is 5 periods away from the current one will be the least important, and the last one will be the most important. As a result, the EMA runs closer to the price than the simple moving average and is more responsive to strong movements on the chart – the latest changes have a greater impact on it. For this method we will be using two EMAs, a 5 period and a 100 period.
The most important element of the EMA multi time frame strategy, however, is to observe the selected instrument at two different time intervals . This allows us to answer the key question – is a given movement in the market significant and should determine further trends in the stock, or is it a temporary disturbance resulting from investors' lack of determination to position themselves. as part of this strategy, we will use the M15 and H1 charts.
Multi time frame EMA strategy – getting into position
The observation of a given item at two different time intervals offers many possibilities. The H1 chart with EMA 5 and EMA 100 averages plotted is used to identify the trend. The matter is simple:
- If the EMA 5 average is above the EMA 100 average, we are in an uptrend at this point
- If the EMA 5 average is below the EMA 100 average, there is now a downward trend
To find the best moment to enter a position, we will use the M15 chart with the same averages.
A buy order should be opened when:
- There is an uptrend in the H1 chart
- In the M15 chart, the average EMA 5 is below the average EMA 100
Here we have an entry in accordance with the conditions described above, opening price 1.08336 (spread costs should be added).
Conversely, a sell order should be opened when:
- There is a downward trend in the H1 chart
- In the M15 chart, the average EMA 5 is above the average EMA 100
The above entry complies with the mentioned conditions, opening price 1.07994.
Multi time frame EMA strategy – exit
The most important element of effective trading is capital protection. So in the multi time frame EMA strategy you should start by setting the Stop Loss level . It should be located:
- Just below the current value of the EMA 100 average on the M15 chart in long position
- Just above the current value of the EMA 100 average on the M15 chart in a short position
However, the Take Profit order should be set at a distance three times greater than the Stop Loss from the opening price, thanks to which we have a very favorable profit / loss ratio (risk ratio).
An example of closing a long position:
The stop loss was at 1.08218, while the position was closed in line with the set Take Proft order at 1.08690.
An example of closing a short position:
he stop loss was at 1.08026 and the position was closed in accordance with the Take Profit order at 1.07898 (spread costs must be added).
Capital management in the multi time frame EMA strategy
Money management is a key issue in the operation of any strategy if we expect it to be profitable. A trader who cannot skillfully manage his own capital is on his way to reset his own investment account.
However, in the case of the multi time frame EMA strategy, the potential profit is three times higher than the risk of loss on each trade . This is due to the strict rules for determining Stop Loss and Take Profit levels. So the investor should be calm, even in the event of a series of unsuccessful entries.
It does not change the fact that even with such a favorable and precisely determined risk ratio, a trader should not issue his account at a risk of more than 2% of his / her own deposit.