Basically, when the price moves above the 20 EMA it is an uptrend, if it moves below it is a downtrend. When the price continuously crosses with the EMA20, it is a signal that the market is entering the sideways zone.

And this is the important part

When the price turns to cross the EMA20 after a trend we wonder if this is a correction or a reversal? Observe how price reacts if:

  • The price approaches (/penetrates) the 20 EMA and then fails to continuously make lower prices, then there is a high probability that the trend will continue after that.
  • If the price penetrates the EMA20 with too much force and continuously makes new highs/lows, it is an early sign that the trend has come to an end.

It's too hard to talk about theory, give us an example.

For the first example of the H1 chart of the Nasdaq index, notice the two circles where the price crosses the EMA20. In the first zone, the price approached and penetrated the EMA with relative force, but after that it could not continue to make lower lows, but instead was a sideways price zone with higher lows => the trend then recovered.

In zone 2, the assessment is a bit more difficult, the price broke the EMA then continued to drop deeply to create a clear bottom, now we are leaning towards the view that the price will reverse, but then the momentum decreases has faded, no lower low has been created and the trend has recovered.

Next example:

The first zone is similar to the previous two, the price penetrated the EMA then lost its downward momentum and the uptrend was restored.

In zone 2 we have many issues to discuss, first the price broke the EMA with great force, then retraced a bit and then made another clear lower low. After bouncing back above the EMA, it was immediately pushed down by the sellers. The length of this zone is quite large, so we are inclined to conclude that the trend will reverse.

How to identify such corrections is simple, no need to complicated the problem, it is important that we know how to use it in the simplest way!