How to Use the 21 EMA ?

To me, the 21 EMA on the daily timeframe chart is a very important level.

Here is how I use it:

1) In a swing trade, if the stock price closes below 21 EMA on high volume, I am most likely to close out the entire position.

2) In a swing trade, if the stock price closes below 21 EMA on low volume, I might keep 20 to 25% of the position open and sell the rest. (provided the market condition is not weak)

3) In a positional trade, if the stock price closes below 21 EMA on high volume, I might sell close to a third of my position (provided the market condition is not weak)

4) In a positional trade, if the stock price closes below 21 EMA on low volume, I would not bother much.

5) A bounce off the 21 EMA means: the 21 EMA is in between the high and low of the candle - AND - the close of the candle is above the midpoint of the candle.

6) If the price bounces off the 21 EMA in a swing (or positional) trade on high volume, I might add to my existing position with a stop loss below the low of the candle. (provided the market condition is strong)

7) If the price bounces off the 21 EMA in a swing (or positional) trade on low volume, I would not pay much attention to it. (Volume is w.r.t 50 SMA line on volume chart)

8) I would never take a fresh position on a bounce off the 21 EMA

9) I would never add to my existing position on a bounce off the 21 EMA in a weak market.

10) I prefer the 8 EMA to be always above the 21 EMA on my existing position. Else, I might go into risk management mode.

11) I prefer an upward sloping 21 EMA (Slope = 21 EMA value of current candle - 21 EMA value of previous candle)

12) By the time the stock closes below the 21 EMA, I am mentally prepared to lose almost more than half of my unrealized gain

13) By the time the stock closes below the 21 EMA, I sometimes might lose my entire unrealized gain as well a little bit of capital invested in the stock. I am willing to take that risk.

14) In a positional trade, if I have eliminated the risk in my position by moving the SL to breakeven, I would not pay any attention to the 21 EMA at all. For me, its a "free-roll trade". In such scenarios, my focus shifts to the 50 SMA

15) I prefer the 21 EMA to be between my entry price and 7-8% SL while taking a fresh position. This way I can use the 21 EMA as a mental stop loss to minimize my loss on the trade, if the position were to go against me.

The moral of the story is:

The power of a moving average is in,

how well you understand it and

how well you use it,

to minimize risk and

optimize gains.

Have a fantastic day today.

Regards,

Rohit Musale, CFA

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