How to Use the 8 EMA ?
- Rohit Musale, CFA
- 7 days ago
- 3 min read
I always keep an eye on the 8 EMA on the daily timeframe chart.
I am looking at the price w.r.t 8 EMA line on the chart.
In this post, I mention 15 points about the 8 EMA line.
Study each one of them carefully. (A casual reading will never help)
In the following points, I am using the words like,
- might
- sometimes
- may
- most likely
- prefer
This is because,
as a swing and a positional trader, I choose to work with,
frameworks, not rules.
Rules are rigid.
But,
Frameworks allow for flexibility & intelligent risk management.
So,
Here is how I use the 8 EMA:
1) In a weak market, if the stock price closes below 8 EMA, I might choose to close my entire position.
2) In a strong market, if the stock price closes below 8 EMA, I would not easily give up on my position. I might sell less than half of my position.
3) When the price closes below 8 EMA on low volume, I sometimes may choose to do nothing.
4) When the price closes below 8 EMA on high volume, I might trim down my position or move my stop loss to breakeven.
5) As long as the price stays above the 8 EMA, I assume that the trend is intact. I generally avoid taking any action in such cases.
6) If the price is above 8 EMA and yet creates a "falling window" or a "falling gap", I am most likely to close out my entire position.
7) If the slope of the 8 EMA is positive, then I assume that the trend is intact. (Slope = 8 EMA Value of Current Candle - 8 EMA Value of Previous Candle)
8) If the slope of the 8 EMA becomes negative, then I might choose to reduce my position size and lock in some partial gains.
9) When the 8 EMA crosses the 21 EMA on the upside, I become alert for a breakout opportunity inside a base.
10) When the 8 EMA crosses the 21 EMA on the downside, I might choose to either reduce my position size "further" or move my stop loss up to breakeven.
11) At the time of the breakout from a base buy point on the daily timeframe, I prefer the following: Price > 8 EMA > 21 EMA > 50 SMA > 150 SMA > 200 SMA
12) If the price bounces off the 8 EMA on high volume, I assume that the trend is intact and finding support at the 8 EMA. I will "never" add to my existing position. The 8 EMA is not for "pullback trades". The 21 EMA is.
13) If the price bounces off the 8 EMA on low volume, I do not see a reason for caution.
14) If the price is above 8 EMA, yet the slope of 8 EMA is almost flat, I do not see a reason for caution yet.
15) If the price breaks the 8 EMA (closes below it), and simultaneously creates a falling window, I am most certainly getting rid of the stock immediately.
The moral of the story is:
I will use my overall assessment of risk to decide what to do,
while I observe the interplay of Price and the 8 EMA line.
This is why I feel,
Trading is an art, not a science.
What I choose to do in a particular market condition might not be the same "course of action" in some other market condition, all else being constant.
Do I memorize all the above points ?
Absolutely not.
Rules are memorized.
Frameworks are internalized.
Your experience of observing the 8 EMA line, will help you
internalize these concepts.
Do not memorize all this.
Important Notes:
1) In the above points, I mentioned high and low volume.
2) I use the 50 SMA line on volume to determine if the current bar is above or below the 50 SMA line.
3) In the above points, I also mention strong and weak market.
4) I use the market condition status on the MarketSmith site to determine if I am in a strong or weak market
5) Strong Market = "Confirmed Uptrend" market status
6) Weak Market = "Uptrend Under Pressure", "Rally Attempt" or "Downtrend" market status as per MarketSmith site.
I would recommend that,
you go granular on the 8 EMA.
A superficial understanding of the 8 EMA is not enough.
You have to go deep.
The 8 EMA line can keep you away from trouble "more often than you realize", yet keeping you fully vested in a strong super trending stock with full position size.
That is a mathematically rewarding concept.
Have a fantastic day today.
Regards,
Rohit Musale, CFA
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