In this Trader Tip, I want to talk about the 50-period Exponential Moving Average (50EMA). It is a very useful chart indicator as it acts as a dynamic support/resistance level on price. As it is a good indicator of the medium-term trend, it is well suited to swing trading and longer-term investing.
For any new traders, the 50EMA is usually drawn on your charts as a RED line, with the 200EMA in GREEN.
6 TIPS FOR USING THE 50EMA ON YOUR CHARTS
1. Judging Market Sentiment – where the price is in relation to the 50EMA will help you to determine if the market is BULLISH or BEARISH.
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When Price is trading ABOVE the 50 EMA, then the market is BULLISH
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Price is trading BELOW the 50EMA, the market is BEARISH
2. It Will Not Reject Price Every Time – the reliability of the 50EMA as a support/resistance level varies depending on what the market is doing. Just like horizontal support/resistance lines, the 50EMA is NOT a concrete wall that will reject price every time. Rather, the price will normally react with the EMA in the same way you do whilst bouncing up and down on a trampoline! And remember, the EMA will move UP and DOWN as price changes.
3. Works Best in a Trending Market – the 50EMA will always provide a stronger level of support/resistance in a trending market. In the chart of Exxon above, following the uptrend, we see the price bounce off the 50 EMA on several occasions. However, the 50 EMA loses its effectiveness in rangebound or choppy (indecisive) market conditions
4. Has Price Respected the 50EMA Recently? – If the price has just bounced off the 50EMA, it is more likely to react to it in the near future.
5. Which Way is the EMA Pointing? – if the 50EMA is pointing UP or DOWN, at a 45-degree angle, it’s a strong indication that the market is trending. If it is pointing SIDEWAYS, it’s telling you that the market is ranging, which is when the 50EMA will be at its weakest.
6. Beware of Choppy Markets – if you find yourself staring at a chart for more than 60 seconds to find a trend, there probably isn’t one. You are more likely to be in a choppy market condition, one which you should avoid. In choppy markets, the 50EMA often proves unreliable compared with a trending market.
SUMMARY
The 50EMA is a useful addition to any trader’s toolkit and one that can help you to increase your edge in the market. It is only one of a number of confluence factors that I use before I consider placing a trade. To learn more, I recommend watching my 5 Steps to Trading Success video. It will highlight the key confluence factors and how to apply them.
Now it’s over to you. It’s time to act and apply what I have just taught you.
Open up your charts and if you are not using them already, add in the 50EMA indicator. Then practice using it using the steps above. I guarantee it will make a difference in your results.
If you would like to become consistently profitable, make sure to read our latest post.
Happy Trading!
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