Trade Against the Retarded by using EMA’s
(A little reminder before you start reading: The graphics look blurry due to the size of my monitor. Please right-click on the images and open the image in a new tab to see clear.)
What is Exponential Moving Average?
Exponential Moving Average (EMA) is a popular technical analysis indicator used in financial markets to analyze and smooth out price data over a specified period. It is similar to a simple moving average (SMA), but it gives more weight to recent price data.
The EMA calculation starts with a specified period, typically represented by a number of periods or days. The formula for calculating the EMA involves taking the current price and multiplying it by a smoothing factor, then adding it to the previous EMA multiplied by (1 — smoothing factor). The smoothing factor determines the weight assigned to the current price relative to the previous EMA.
Mathematically, the formula for calculating the EMA is as follows:
EMA = (Current Price * Smoothing Factor) + (Previous EMA * (1 — Smoothing Factor))
The smoothing factor is usually calculated based on the chosen period. It is derived from the formula: Smoothing Factor = 2 / (Period + 1)
The EMA calculation continues for each subsequent data point, with the most recent prices having a higher impact on the EMA value due to the exponential nature of the calculation.
The EMA is used to identify trends, generate trading signals, and provide support and resistance levels. Traders and investors often compare the EMA to the price itself or to other moving averages to make informed decisions about buying or selling assets. Shorter EMA periods react more quickly to recent price changes, while longer EMA periods provide a smoother trend line.
Problem of Using EMA’s
As I said, moving averages are a powerful indicator used by many people and algorithms. I’ve used ema’s for many years, but I usually long when price pullbacks to the moving average, the way everyone uses it, and short when price bearish retests to the moving average. Usually, I can say that these trades were not working properly because either the price was not touching the moving average exactly or it was going far below the moving average and taking my stops. This made me quite angry but I still didn’t know any other technical analysis tools at that time and I continued to use ema’s. Then I saw that other people were using different ema’s and some people were using sma instead of ema, and I was quite confused about this moving average. I know you have taken a long position many times when the price came to the moving average, but I know that after the price spent a while under the ema, you thought that the price broke the ema and now you need to close the long position, and after you close the position, the price goes up in the opposite direction and you think how stupid you are. I’ve been in this situation many times while using emas, and I’ve done a lot of research to figure out why. Since I know that most ema users have these problems now, I will explain how you should use emas most accurately (in my opinion).
Choosing the Right Ema’s
Generally, ema50 and ema200 are used in the markets and I can say that all algorithms know these emas and most moving average algorithms trade using these ema, but I cannot say that ema50 and ema200 work in every parity. In order to choose the right moving average, you need to test this moving average in the parity and time frame you have traded. For example, while ema50 works on bitcoin’s hourly chart, it may not work the same on its weekly chart. this is about coding algorithms in general. Therefore, in order to find the right ema, you need to determine your parity and time frame, and then test the generally used emas in order.
As a result of my tests and trades, I generally prefer to use 8, 21, 50, 200 moving averages. Because 8 and 21 are fibonacci numbers and if you know how valuable fibonacci is, I can say that it works very well in moving averages as well. The reason why I prefer 50 and 200 is the moving averages, which are the most widely used in crypto algorithms and other markets and they work good if you really know how to use them.
First, let’s talk a little bit about how EMA works. If the value you use in EMA is small, these averages will move closer to the price and show fast trends. For example, ema8 will turn its direction up and down very quickly, while ema100 will move very slowly and change direction accordingly. Usually, when ema 8 turns up and down too much, ema100 doesn’t even move in its price and direction during that time. Therefore, the larger the ema numbers, the higher the probability of activity and, accordingly, support and resistance. I don’t think you will be a very successful trader by using ema8 in 15m time frame because as you can see in the example, the price constantly goes above and below ema 8 and gives you very mixed signals, so as the time frame decreases, the growth of emas gives less signals and accurate results.
As you can see, ema8 is almost sticking to the price, and looking at the buy and sell trades using ema8 on this chart will only give you a headache. Conversely, as the time frame grows, low emas work quite well because if you are trading by looking at the weekly and monthly chart, you will only lose time and money by maintaining a buy position while the price is above ema100 or larger ema and selling below ema100.
For example, let’s assume that you buy when price is above ema200 and sell when price is below ema200 by looking at the weekly chart, and we need to assume that you do this instantly like a robot, because when the price goes above ema200 on the weekly chart, you will emotionally look at the hourly and daily chart and say that you will buy when the price makes a little correction, but while the price is thinking about this. the next week it will rise even higher and you will buy 5–10% above ema200, the same situation will happen when selling and you will sell 5–10% below again because you are human and you cannot trade like a machine due to your emotional nature, unless you train yourself. As a result, in this example, follow this process and see how much % you miss and how little you earn. Okay, you may have made some money, but there is no limit to the time you lost. Therefore, as the time frame rises, the lower moving averages will increase your profitability in these price fluctuations.
As you can see, on the weekly chart, you will notice that you get a much higher profit rate by making more frequent buy and sell transactions with ema8. Better results can be obtained by using other moving averages, but for example, the larger the timeframe, the smaller the value of the moving average and vice versa will produce very good results.
You can see that sometimes it gives false signals even if we use ema8. For example, after going above the ema8 in some regions, it suddenly turns back to the ema8 and in these regions, you will both feel emotional pressure and your trading dynamics will slow down and you will look for other reasons to support your opinion. So I’ll show you how to use the right ema effectively, but there’s still time. You’ll be surprised how you can find a new edge that can use these false signals and increase your profitability.
Ranges and Trends
There are places where you can and cannot use moving averages effectively. I think you can be more successful in this new edge, which you will gain by identifying these situations. First of all, you may have noticed that when the price is in an uptrend, the moving averages rise with it below the price, and when the price falls, it falls above it to become a resistance. That’s why I usually use moving averages to determine the start or end of a trend. In general, you should understand that if the price spends time above the moving averages you have determined, it is in an uptrend and you should look long at the support levels, if the price spends time below the moving averages, it is in a downtrend and you should look short at the resistance levels. Instead of executing trades using moving averages, you can use this trend determination of moving averages to execute your other edges and chase transactions that are in line with the trend found by the price. In general, the price has 2 different movements, the first is that it makes a range movement between 2 certain prices that are accumulation / distribution, and the second is that it is in a trend-prone rising or falling movement. Generally, moving averages provide more effective use if the price is in a trend because, as you can see in the example below, when it is in the range, it constantly goes above and below the ema, and it tends to move with the ema and gives mixed signals. So I don’t recommend you to use ema’s as edge while in range, but you can find edge in this range by going down to lower time frame.
As you can see, it is really difficult to use emas in this range in 4h time frame and some people still waste all their money and time trying to use emas in the range. In such range times, if you are looking for edge using ema, the best thing to do is to go down to lower time frame and search for edge.
It is very important to determine when the price moves in the range. It is very meaningless to look for the edge by looking at the graph of the emas in the 4h time frame, in the parity that entered the range movement in the 4h time frame. Therefore, you need to determine the liquidity/ support/ resistance zones of the price that entered the range movement at 4h with your other technical analysis information and trade by looking at the 1h time frame. I recommend you to read the “trading in the range” article I wrote here before. So it’s really hard to use ema’s in range . You need to combine your other edges and move.
In this example, you need to understand that it is meaningless to trade by looking at the moving averages on the price that moves the range on the daily chart. so you need to use emas by looking at lower time frames at the price in the range. I will explain in detail how to use ema in range trading, but first let’s give some more examples.
When we examine the same price movement with the correct moving average in a 4h time frame, you can see how good the moving average signals us. But these signals do not buy when they go above it, not sell when they go below. In this article, I will explain how to use emas in the most effective way. In summary, when the price enters the range movement, we need to know what to do in the range (I explained this in the other article) and use the ema to add an edge to our edge in this range movement. If there is a range on the 4h timeframe chart and the price is adhering to the ema’s, you should do it if you can trade in the 1h time frame. If you can’t trade under the 4h time frame (swing trade) you just have to wait for the price to leave the range and this is the hardest part. It is very difficult to know when the price will leave the range movement and start a trend by using the ema because you may think that the uptrend starts when the price is above the ema, but the downtrend starts when the ema is below the ema, but this movement will happen many times in the range and the price will get tired of you until you say that the range will not end anymore and you will leave the price range. It will. Therefore, you need to find the time when the price will leave the range by using other tools, but you do not need to know when it will leave the range. The important thing is to play your game by sticking to the plan as long as it stays within the range. For example, you will buy 3–4 trades thinking that it will stay in the range and you will win most of it, you will enter the trade thinking that the next trade will stay in the range again, and if it leaves the range, you will lose 1 of the 5 trades you bought, but in this way, you understand that the price has started to trend movement and you change your game plan accordingly. So i explain the secrets of using ema’s while in the price range in the next topic.
Understanding The Price Cycles
So why does the price range and trend? Usually, after a long range movement, when the price leaves this range, the trend movement begins and the price, which moves very close to the moving averages within the range, starts to move away from the moving averages while in the trend and to open the distance between the moving averages with a larger value such as ema200. Now the distance is opened so much that the impulse move ends and the price regresses back to these moving averages and experiences the stage of rest and withdrawal. When the price moves sideways by intertwining with each other, the market gathers strength and a new trend formation begins. This happens vice versa as well. The price is voracious when it is in an uptrend. Now, when it reaches the top of the bull, it starts to get more appetite and there are such rapid rises that it now moves away from even small moving averages, and at such times it is necessary to be very careful. If the price moves away from the moving averages, it means that the price has risen with inefficiency, and so at some point, the price makes a new range, waits for the moving averages to approach, tests the moving averages to blow their stops for the last time when people lose money and open new short positions in the range, or they go above and bulls. Revives and then continues its trend.
Let’s look at how an entire cycle progresses using moving averages. As you can see, how close are the moving averages to each other at the beginning of the trend. This now says that the price is quite tight and the range movement will be concluded in a short time. The upward trend of the breakout indicates that the trend is likely to be on the upside. That is, with a properly placed stop, you can bet against that this long-term accumulation is now over and a new uptrend has started. You can see how close the moving averages are to each other when the trend starts. The closeness of the moving averages ensures that the region is strong support and resistance. Especially towards the end of the range movement, rapid movements are seen in the price and this strong resistance zone is broken and some time is spent on the moving averages. Then the real uptrend begins. In a long-term accumulation movement, if the price is now above the moving averages with a strong volume, and if the moving averages close the distance between them in the old decline and move closer to each other, now you should think that the price will leave this range at any moment and you need to make your psychology believe that a new trend will start. because watching the price in the range for a long time will give you the feeling that every range high test is fake and you will miss the whole rise. Notice how the distance between the moving averages widens quickly once the range is broken and the price is now rapidly rising (indicated by the red boxes). As it moves away from the price range, it gets more irritable and starts to move away from the moving averages. this is normal in a certain period of time and in such a bullish move the pullbacks are fast and usually the pullbacks stay wick in the higher time frame. so exiting the market at the first bearish move when the trend starts will cause you to miss the bigger rise. No matter how long the whales increase the number of assets in their hands by making range movements, they cannot sell them with the slightest increase. For them to sell all the goods they have, there must be much more uptrend and distribution movements around the peak, so don’t make snap decisions.
The best question to ask me here is there has been a lot of flat distributions on the daily chart throughout this trend, how do we know which is the true end of the trend and which is the reaccumulation? You might say yes, you’re right to ask that, so let’s dig a little deeper. When you look at the charts, when the price is in a trend, the low-valued ema is always above the high-valued ema, and all the emaes are pointing up (ema8 is always above ema50 and ema200 in an uptrend). The price will experience flat re-accumulation zones in some regions during this rise, and if you are generally looking at a higher time frame, the moving averages are always horizontal and upwards in these rising regions because a new trend has started and as the price approaches the moving averages, it creates a wick, which allows the daily closings to stay above the moving averages and to the moving averages. Keeps the direction of the averages up and horizontal.
As you can see, why are all the reaccumulation zones that are likely to be peaks so small? After months of accumulation, the whales cannot sell you the assets they have collected at the bottom in such a short time, they need more time and bigger aggressive buyers. As you can see, the slope of the ascent gradually increases after the horizontal rest, and the slope is now almost steep at the top. Where the slope is close to steepness, it’s time to stop the excitement and pay attention. The steepest and steepest ascents are where whales can easily unload their goods on you. And you can see that the direction of the moving averages has never turned down during this whole uptrend, and ema21 has always remained above ema50.
If you’re a long-term investor and don’t get insider information, you can never sell at the top, but you can use moving averages effectively and expect a new low to take profit from your investments from regions very close to the top. As you can see here, the price goes up with revenge shorts opened by people who miss the rise by making a bear trap by spending a short time below the moving averages in the gray areas. price goes below the moving averages in some areas during the rise, this is not a signal for selling because as I said, as long as the direction of the moving averages shows upwards or horizontally, these decreases are a buying opportunity and a bear trap. you can already see how fast the purchases are coming and it continues in the trend again, but now the moving average slope is increasing quite a lot and these moving averages that open between ema200 and ema200 become a magnet for the price. You can never sell at the top, but when the price is at the top, how fast does it move up and down and move sideways for longer than other regions. When he tests ema50 from the top for the first time, if the bull continues to rise, you expect a new high to be made, but as you can see, the price does not start a new rise after testing ema50, on the contrary, it makes a lower high. This is never a sell signal as long as the direction of the charts is horizontal and up, but this is a pretty big be careful peak very close signal. Usually because people are greedy, they don’t mind that the price doesn’t make a new peak after trapping bears below ema50, but now in these regions, whales dump almost all of their possessions and have emptied most of it during the fall. Although the price tests ema50 many times in this region, the reaction is always insufficient and now the price goes below ema50 and starts its movement in the gray zone. meanwhile, ema21 goes below ema50 and the direction of ema is turning downwards and now really big peak signals are coming. it may still be a bear trap because in other gray areas the price went below ema50 but then it quickly reclaimed and made a new peak. but here the price does not do such a thing and rejects after bearish retest to the moving averages. here you must believe that the bull is over and stay away until a new reclaim comes. you also now need to quickly decide whether the bull is over using other technical analysis. As you can see, breaking the blue zone downwards and retesting this zone as a bearish retest, ema now pointing downward and ema 21 below ema50 are very big trend reversal signs. In this way, even if you do not know the top, you can sell from the place close to the top.
Now let’s talk about the bear market trend and the logic behind it. We still haven’t talked about how to trade using emas and how to gain an edge. So far, I’m talking about the logic of moving averages and their place in the market structure in general, and I think this information is really important. When the moving averages start to show the downward direction after a long rise, I recommend that you do not wait for a new rise for a long time anymore because it is a very big one. This is the price after a big rally with inefficiency. It will want to refill most of its inefficiency movement and a new prolonged accumulation phase must begin for a new bull to arrive. Do not forget that the moving averages on the weekly and 3-day charts were quite far from each other and the distance between them will decrease with the new downtrend and this decrease will start to converge and a new accumulation phase will occur, but first let’s talk about the downtrends. In an uptrend it is usually not difficult to make money by longing too much because the market wants to give you this taste and make money, the more you win, the more you will want it and the market will feed this side of you and you will be asleep when the price reaches the top. In the bear market, trap movements are usually seen. What are trap moves? It stops those who want to decrease the purchase price by buying at the top and making new purchases during the rise, and the bears who open short at the bottom prices, and reintroduce the people who think that the new trend has started, that is, the downtrends try to make you hit the bottom by absorbing all the money in your hand. As you can see, while there are big decreases, the gap between the moving averages opens just like in the uptrend, then the price rises above the moving averages to close this gap and trap people, creating trap zones. In this way, by giving fake bull signals, it makes people buy and starts to exploit you. As you can see, the moving averages are down and horizontal throughout the entire decline. yes, it sometimes points upwards, but remember that we have had a very long rise and a new rise will not be experienced again with 1–2 weeks of accumulation. This downward and horizontal movement continues until the moving averages on the weekly and monthly charts merge and stick together again.
As you can see, while the moving averages on the 3-day and weekly charts show the downward direction, sometimes the price goes above the moving averages, this is the same trap movement as in the bull rise. because when people come to the moving average, they start to open short transactions, but because the market will not give them short shorts easily, they explode their stops, make people who think that the new trend has started to buy, and continue to decline. Moving averages pointing downwards is a sign of a bear market. for a new bull, the moving averages should no longer be downwards but horizontal and very conjoined.
The end of the uptrends with sharp rises has always continued with sharp declines. but if the rise is healthier and slower, it will be healthy and horizontally weighted unless there is an effect in the global world on the declines. As you can see, after a strong downtrend, the distance between the moving averages widens and the gap between the moving averages causes bear market rises in the price, which is why the rises in the bearish market are sharp and spiky and thanks to these movements, the moving averages bring the price closer to itself. As you can see in the chart above, the downward slope of the moving averages decreases after a while and becomes horizontal. It is pointless to wait for a new bull before the moving averages turn horizontal after a long decline and converge, because the price needs to balance this fall, find new demand and rest. This accumulation does not start until the price at which the whales will buy again comes. Most people start doing DCA when moving averages are moving down, but this is so wrong. You never know when the trend will end and as long as the moving averages are facing downwards, any uptrend will be just a reaction. Whenever the moving averages converge and form a solid solid support and the price moves above and below these moving averages, people get fed up with the time capitulation and leave the market. When does this accumulation end? No one knows this, but whenever there is a sharp rise and then the confirmation of this rise is confirmed in the higher time frame, we can say that it is the beginning of a new bull. In general, I talked about how you should use moving averages when investing or to determine the trend of the market, now I will talk about how we can use moving averages as an edge when trading.
Define Your Edge
After learning all this, we will now learn how to develop an edge using moving averages. People often use moving averages with a very simple logic. Buy when the price hits the moving average, sell when it falls below and vice versa. but as I said, there are main topics that should be considered when using moving averages. We talked about how you will determine the value of the moving average used according to the pair and time frame you want to trade. and while some moving averages are stuck with the price in some timeframes, when you look at the chart in the same region in the lower timeframe, you will see that you will get sharper and less signals. In conclusion, it matters what weight you use. I prefer the ema50–200 because I like to trade against people who trade with moving averages because these are moving averages that most people look at and use.
After determining which moving averages to use, it’s time to determine the trend. The price moves in 2 different ways. bullish and bearish or accumulating horizontal movement in a trend. The logic of what you need to do when using moving averages in these 2 events is the same, but we will cover the details you need to know in both events. Let’s start with the trend first.
In order to understand the trend formations, you need to look at the moving averages in the pair and time frame you want, if the price is above the moving averages, you can determine that the price is in an uptrend as you approach the moving averages, and if the bearish candles are thicker, the bullish candles with needles. Most of the moving average users start to buy when they cut ema50–200 upwards and continue to do dca until the price reaches the moving averages, but since the moving average cross is a late signaling indicator, it is likely that when the crossing occurs, the price has already moved far enough from the range and bought with the invalidation level. level is quite different and has a low RR. Since we know this behavior of people and we know that they buy when the price approaches the prices, why do we do what all retarded people do? try it and you will see that using only emas in this way will only cause harm. So how can we trade against these retarded people? First of all, if these people are buying when it comes to moving average, where are these people’s stops? It will most likely be below the moving average. We must learn to trade while others stop. You should have learned by now that you can’t make money doing what the crowd does. As a result, when I see an uptrend or downtrend, I wait for the price to reach the moving averages and break them down. Also, when the price is in an uptrend and falling below the moving averages, 2 different liquidities greet us. first, people who think the trend is over without distribution stop, and second, people who think the trend is over and open short trades because the price breaks the moving average downwards is a great liquidity for big hands in this market to trade, but I usually use extra different technical analysis (simple S/R level, I also prefer to use liquidity pools, so I’m more confident in trading.
Here, we watch the trend transformation by breaking ema50 and turning the direction of ema50 up after the price’s downtrend and accumulation in the higher time frame. I do not like to use moving averages in trend transformations because as you can see, it deviates above ema50 throughout the entire downtrend and continues to decline again, but by combining it with other tools, you can of course determine when the real downtrend will end with moving averages, but what I am trying to teach you here is for trades using edge moving averages. It’s about learning to trade against. As you can see, after part of the uptrend, the price tests ema50 and if you look at the reactions while doing this test, it is very weak and slowly descends below ema50 and of course bursts the stops below ema50. See how quickly the upward movement begins after taking the stops. Of course, confirmation is required here. You should not take a long position just because the price is below ema50 because if the price is already below ema50 and you get long below ema50, what is the invalidation level where your idea is wrong? it will be just to gamble. price goes below ema50 is the indicator of preparing to buy a long for us when price goes above ema50 again and sits then you will get the trigger and your invalidation level may be below ema50 or it may be below the harder deviation level if you are very confident in yourself and trade but weak If you think it is ema50, you can close it when you open a long position after a while after the price reclaims ema50, if it falls below ema50 again. Here, the price reclaiming ema50 is an indication that many people stop and many people enter short positions. While the moving averages are still pointing upwards, going short on the first breakout will only add you to the liquidity pool.
If you look at the deviation under 3 different ema50, after each breakdown, after the price is somewhat consolidated above ema50, it punishes people who enter a short position under ema50 quickly. But of course, there may be mistakes in this edge and you may be stopped, but according to the backtests I have done, this is one of the best edges I have found at the moment. Because most people use simple falling trend lines and moving averages and this strategy will really increase your success rate by trading against retarded.
Then you see why you don’t buy long every time the price goes below ema50. Price breaks ema50 hard and never reclaims. Again, unless the price goes above ema50, you should not buy long unless deviation occurs. Here you can clearly see that you have to wait for the trigger before taking a long. In the example here, I will show you how you should trade using deviation while the price is in a downtrend. The price breaks the uptrend and then the ema50 direction turns down and the price spends too much time below the ema50. As the ema50 direction is down, any price action above ema50 should tell you to prepare for your new short position. When the deviation occurs and the price comes below ema50, you should enter the short position and target new lows.
I’m going to talk about another fine detail you need to know about moving averages. This information was found after long screen viewings. As you can see, after a clean deviation on ema50, the price is testing ema50 2 times in a perfect way after the trade you received. so what should that mean? As I said, many people trade using ema and when the price touched ema50, 2 different groups of people opened short transactions after these touches and none of them had a stop. This tells me that a lot of people are on easy shorts and if you look at the price, after this move it stops the decline and starts to move horizontally. This is a skill that will develop as your screen viewing time increases. Then, after the ema50 breakdown and the ltf consilidate movement above it, the price explodes and starts a new uptrend.
More examples about trend deviations above the EMA’s
Using moving averages in the range is really the most difficult because you have to combine them with your other technical analysis. As I said, I have told you enough about how to use moving averages, but you can use other price action movements to use within the range, and you can use the ema50 deviation movement to determine your trigger and invalidation point. Reclaiming ema50 again after the price has deviated under ema50 is to trade against retarded people who use ema completely. You can understand this by watching more screens. I’ll show you how I use ema50 in range, but as I said, this goes into a bit more depth and now it’s up to you here.
I tried to explain in the chart I showed above, but if I had to say, I tried to explain the market structure and easy price action movements, but as I said, you need to spend more time and test to use the ema50 deviation trigger a little more. As I said before I start I am trying to teach you a new edge and I think you can become a very successful trader if you add this edge to your current trading system.
If you have read so far, I think you have learned a lot about the logic of moving averages, how the trend and accumulation movements are formed on the weekly charts in long-term investments, how you can use the deviations on the ema as a trigger.
The reason I used ema50 in the above example is that ema50 works well in bitcoin, but you can use other moving average values in other parities.
Thanks for reading all the way here, you can join OKX with my ref link below and support the content!
If you use my OKX ref link you can also get access to my private discord! (Still developing bot so i will announce it when it is ready)
