The tools of the veteran trader are often very simple, but their effectiveness leaves amateurs hungry. The tools are of course the same, we all can easily access them, the difference lies in how they are used. The goal of this article is to give you the following 3 things:
  • Identify correctly the strength of a trend;
  • Confidence in holding during periods of price correcting in trend;
  • Help determine the exact stop loss when trading swing trade with the trend.
Essentially, when the price moves above the EMA20 it's an uptrend, if it moves below it's a downtrend. When the price continuously crosses the EMA20, it is the signal of the market to enter the sideways.

And this is the important part
When the price turns to cross the EMA20 after a trend do we wonder if this is a correction or a reversal? Observe how the price responds if:
  • If the price approaches (/ penetrates) the EMA20 then cannot continuously create lower prices, the trend is likely to continue after that.
  • If the price penetrates the EMA20 with too much force, and then continuously creates new highs/lows, it is an early sign that the trend is over.
Below are a few examples:

In the first example of an H1 chart of the Nasdaq index, notice two areas circled when the price crosses the EMA20. In the first zone, the price approaches and penetrates the EMA with a relative force, but then it cannot continue to create lower lows, but instead is a flat price area with higher lows => trend then rebound.

In zone 2, the judgment is a bit more difficult, the price breaks down the EMA then continues to drop deeply and creates a clear bottom, at the moment we are inclined to assume that the price will reverse, but then the momentum falls Fading away, no lower bottom has been created, and the trend has recovered.

Next example:

The first zone is similar to the two areas just now, price penetrates the EMA then loses its momentum and the uptrend is recovered.

In zone 2 we have many issues to discuss, first, the price broke the EMA with a very strong force, then recovered a bit, and then made a clear lower low. After rebounding above the EMA, it was immediately pressed down again by the sellers. The length of this zone is quite large, so we will be inclined to conclude that the trend will reverse.