![]() ![]() If you are not giving your trade at least 1.5 ATR of wiggle room you will often exit a trade before even giving it a chance to unfold in the direction you had correctly projected. ![]() Usually a stop loss level at 1.5 ATR’s is a good place to start and sometimes using 2 ATR for longer term trades is even better. ATR stands for average true range and helps quantify the volatility of the stock so you have a stop loss at a level outside of the normal price fluctuations. If I am trading stock I will often use an ATR based stop level. Closing below that level often is a signal that the stock is not as strong as you expected and is an ok time to cut the loss. With options it’s fairly simple as you can risk the premium paid of the option and let time play over the course of the trade as long as the stock does not close below the 21 EMA. Understanding how much to risk depends on your trading style. In these examples, I have the 8 EMA as the thinner yellow line and the 21 EMA as the thicker blue line. Sometimes the stock runs away but any dip back to the 8 EMA would be a buy point such as at points B and C where the stock retests both the 8 and 21 EMA during the course of a week before launching higher off that 21 EMA blue line. At the first arrow in early January, the 8 EMA crossed above the 21 EMA and the stock moved higher. This is shown below in the chart of XLE, the Energy Oil ETF, which has been on a very strong run since the start of 2022. Once we see a clear cross of the 8 EMA crossing above the 21 EMA, it shows the bulls are in control as the momentum of the short term trend has shifted up. Understanding the main trend in a market can easily be seen through the slope of the 8/21 EMA. One way I like to use these crossovers is for directional bias of trend. You can even scan for new 52 week highs or 8/21 EMA crossover’s to see when a new trend may be underway. Simply put if a stock is making higher highs and higher lows on any given timeframe, then it’s defined as an uptrend. So how do you know if the markets are trending or not? But when markets get volatile and choppy its best to focus on more mean reversion trading that looks for prices to revert back to its key moving averages from extended levels. I can look to the 21 EMA as a pullback buy point in a trend that is showing signs of setting up for a breakout, and often in a very strong existing trend, buying dips to the 8 EMA is a great way to enter into an ongoing trend. I might look at trading trends when the market price structure is clearly pointing to trend continuation and upsloping moving averages are often the best way to see this in an uptrend. I trade a variety of strategies based on whatever the current market environment dictates. How to Identify Trends Using the 8/21 EMA This gives you an idea of where price has been on average in the past month. Sometimes up to a month as well which coincides nicely with the 21 day moving average as there are roughly 20-21 trading days in an average month. Some people use 5 EMA’s for a very short term look at trend but I have always liked the 8/21 EMA set of moving averages to determine trend because I am usually focused on trades anywhere between a few days to a few weeks. There is nothing special about those amounts of measure, you can use a 10 period EMA and a 20 period EMA but I like the fibonacci based numbers which include 8 and 21. This is the backbone of my trading on most timeframes as it combines both the shorter term 8 EMA and slightly longer term 21 EMA. ![]() Understanding where these averages are can help you see how extended a stock is in the short term and whether it’s ripe for a retracement back to its mean, aka average. One of the trading concepts I refer to a lot is where a stock price is in relation to its 8 and 21 period exponential moving averages (EMA’s). ![]()
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