The Power of the 20 EMA and 50 EMA in Forex Trading

The 20 ema is used by most institutions, banks, funds and big boys as part of their trading. Some use it with the cross of another MA or MAs as a system. Many of the little guys (us) use the 20 ema in some form or other in our trading. Some professional traders use the price and 20 ema as their method by buying a close above the 20 ema and selling a close below the 20 ema (don’t try this at home, as they say, as the Professionals also use filters to avoid whipsaws and “false” moves).

For consistency all charts posted on this website will display the 20 EMA in RED and the 50 EMA in BLUE

To a certain extent, the use of the 20 ema becomes, like Fibonacci retracements, a self fulfilling prophecy.

Our use of the 20 ema is not as a trigger in any shape of form, but as one of the tools to help us in our decision making process. It should never be used in isolation and never be taken as “the last word”.

Think of the 20 ema as equilibrium, or the balance line which is the point at which buyers and sellers AGREE on price. Remember we are dealing with energy both of the market and its traders. Energy ALWAYS seeks balance through the path of least resistance. If you haven’t done already, you should study thousands of charts (daily and up) with the 20 ema and 50 ema moving averages on and note several things:

The slope of the averages The cross of the averages Price relative to the averages

You should also take note:

  • What the market is doing when the 20 ema is flat
  • What the market is doing when the slope is up AND how STEEP that slope is
  • What the market is doing when the slope is down AND how STEEP that slope is
  • What happens to price when the 20 ema acts as resistance
  • What happens to price when the 20 ema acts as support
  • How price reacts around the 20 ema
  • What happens when the 20 ema is broken
  • What happens to price when it crosses the 50 ema
  • What happens to price when, and after, it is trapped between the 20 ema and the 50 ema
  • What happens to price when it is stretched away from the 20 ema

Think of the 20 ema as a magnet which attracts price (equilibrium). Outside forces greater than the power of the magnet ( buyers or sellers) pull prices away from the magnet. As price pulls away from the magnet, it takes the 20 ema with it but at a slower and lagging rate. The price reaches a certain point beyond the 20 ema where the 20 ema invokes its elastic limit and pulls prices back in line.

If you take the time to study each pair going back as far as your data allows, you will find that there is, for each pair, a certain number of pips that price moves away from the 20 ema before the 20 ema pulls price back into line (equilibrium)

The slope of the 20 ema gives you a “rough” approximation of momentum – use this with my TLs and you have a very good Momentum system.

The slope of the 20 ema and the cross of the 20 ema above the 50 ema tells you which direction you should be trading in.

The 50 ema is not as powerful as the 20 ema but when price “uses” the 50 ema, take note.

As per our style of no spoon feeding, we have given you the pointers, now you do the work and prove the value of the 20 ema for yourself. Nothing works better than something you have proved for yourself AND therefore BELIEVE in.

Add the knowledge of the power of the 20 ema to our PASR and we have an edge over most traders. In case of any conflict, PASR rules over EVERYTHING.

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path_of_learning/the_power_of_the_20.txt · Last modified: 2010/08/12 10:13 (external edit)
 
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