EMA crossover for first-time traders

First-time traders are often faced with the question: “what trading strategy should I learn first?”, “where do I start?” If you’ve ever asked yourself this question, there’s an answer!

One of the trading strategies that every beginner must master to make their trading journey productive is the EMA crossover strategy, as this approach can be ultimately helpful when it comes to developing your trading skills and improving your risk-taking knowledge.

The Exponential Moving Average (EMA) crossover is a trading indicator emphasizing recent market prices. This approach is accomplished by testing the efficiency of the moving average to give an adequate response whenever there is an update to the market information.

How can first-time traders apply the EMA crossover strategy?

The technique helps with determining whether a trend is bearish or bullish. Also, it gives detailed information when a market is consolidated. All of these features of the EMA are fantastic and should be maximized by first-time traders. They help first-time traders carry out market analysis with the ultimate goal of making informed decisions.

To understand better, let us examine the chart below:

When the fast-moving average overlaps or crosses the slow-moving average from the top, a bearish signal is given; hence first-time traders can start planning how to go short on the underlying asset. Conversely, when the fast-moving average from beneath overlaps the slow-moving average, it produces a bullish signal. This means traders can go long on the underlying asset since there is a clear sign of a rally. This EMA crossover strategy, also known as period line, is widespread among traders, especially for beginners who are just getting the hang of the market.

Strategy breakdown on EMA crossover

Every successful trading strategy is backed by step-by-step instructions on how to execute them. Here, you will learn a simple approach to trading the period line crossover. Let’s get into it.

Here are the things you will need for this strategy:

• A 30-minute price chart of your preferred asset
• A 50-period line
• A 20-period line

Depending on your trading style and preference, you can adjust the number of periods. 

A shorter time frame is a good choice for first-time day traders. First-time swing traders should consider a more prolonged time frame when trading the EMA crossover. Whenever the 20-period line crosses over the 50-period line, it creates your best chance to go long.

Before looking out for trading chances, you must define what direction the market price is trending in. This can be achieved using the 50-period line as the base trading indicator. Alternatively, first-time traders can use other trading indicators like the Parabolic SAR. This unique trading strategy is poised to identify the center of an existing trend and the exact price movement. Since it uses backward-looking data, traders will only get a sign after changes are made to the market’s current condition.

Going along with the period line approach

Going long or entering the position of a buyer as a first-time trader requires that you:

—Identify the direction the market is trending in.

—Wait patiently for the 20-period line to cross above the 50-period line

—You can proceed long once you notice that the crossover is achieved

While waiting for the crossover, other moving average indicators, such as the Simple Moving Average (SMA), can reduce the number of fakeouts.

Going short with a period-line approach 

It is normal to think that going short with this technique is the direct opposite of what happens when going long. For the benefit of the doubt, here is what you will need to profit from a declining trend as a first-time trader.

—Identify what direction the market is trending in.

—Wait patiently for the 20-period line to cross below the 50-period line

—You can go short once you notice that the crossover is achieved.

Risk management strategy with EMA control tool

A priced strategy that every trader should embrace, regardless of their level of experience, is risk management. Even when using EMA trendlines, risk management is pivotal in ensuring that all the effort put into the strategy doesn’t go down the drain.

Let’s discuss two risk management strategies for first-time traders using EMA trendlines.

1. Stop-loss strategy with EMA trendlines

A crucial part of trading is having a solid damage control system. Placing a stop-loss order, in this case, is a way of controlling damage (loss) when trading.

With the EMA crossover effective on your price chart, the best place to set your stop-loss order as a first-time trader is above or below the recent price swing.

Practice this strategy with a demo account until you can trade with a live account.

2. Take-profit strategy with EMA trendlines

Trading with a take-profit strategy with the EMA crossover is equally essential as the stop-loss order. However, the results of the take-profit strategy depends on a favorable risk-reward ratio.

There are two primary suggestions for the take-profit strategy:

1. Profit target

Targeting critical levels on the chart and placing profit targets will allow first-time traders to maximize their profit.

2. Trailing stop

Trading with a trailing stop is another risk management technique for first-time traders. It involves monitoring the market and price movement and setting a stop loss.

Benefits of the crossover strategy

There are benefits to using this strategy in your trade. Below are a few:

• Due to the responsive nature of this trading strategy, it will be easy for traders to identify the entry and exit points.
• EMA crossover strategy can provide fast adaptation to market changes
• When used with a trailing-stop strategy, this strategic approach can provide good returns on investment.

The bottom line

The EMA trendline is a potent one that helps first-time traders understand how market fluctuations work and is also very useful for traders aiming to profit from trend changes. In addition, it gives first-time traders a customized way of identifying trendlines and other opportunities in the market.

However, it is in the traders’ best interest to note that this strategy only works sometimes. The trend in the price of an asset only happens about 30% of the time. This is where your knowledge of risk management and control will come in. While the EMA crossover strategy is an excellent tool, you must find a technique to define a trend, especially when there is consolidation. This practice will help you take advantage of the different prices in the market.

Sources:

1. CNBC special reports;  CBNC trading techniques and tips

2. Investopedia analysis; Trading crossovers 

3. Business insider; Strategy and crossovers analysis (Business)