Trading the 200ema on M5 chart?

A

aleclaw

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Hi There,

Can any experienced traders point me towards strategies regarding the 200ema?

I've just completed a decent week, but noticed lately on the 5 minute charts that, in a down trending market (GBP USD, and EUR USD), that the 200ema which I've recently plotted on my charts, has acted as a reliable Resistance line followed by big moves down. Is this what's called a pivot point?

Had I taken short trades above the 200ema, even with an aggressive stop loss, I could have made substantial gains. I think with a 20 pip stop loss, one would have enjoyed a 50/50 win/loss ratio but probably a 75/25 profit/loss ratio taking a short entry 5 pips above the 200ema.

I can't find the source I read some time ago about strategies based around the 200ema, and I'm already having success using MACD divergence and crosses for entries. This week, using the 200ema as an entry point would have been far more profitable - maybe this only works in a steeply trending market. I wondered if anyone could short-circuit my resaearch by pointing me in the right direction.

P.S. I'm a newbie (quite obviously from this question!)

Many Thanks,
Alec
 
Probably a reaction to the news gave you enough volatility. Forward test it and see how things are different without news.
 
shadowninja said:
Probably a reaction to the news gave you enough volatility. Forward test it and see how things are different without news.
Click to expand...

Good advice - many thanks shadowninja - will do.
Guys like you make it worthwhile joining this community.
 
aleclaw said:
Hi There,

Can any experienced traders point me towards strategies regarding the 200ema?

I've just completed a decent week, but noticed lately on the 5 minute charts that, in a down trending market (GBP USD, and EUR USD), that the 200ema which I've recently plotted on my charts, has acted as a reliable Resistance line followed by big moves down. Is this what's called a pivot point?

Had I taken short trades above the 200ema, even with an aggressive stop loss, I could have made substantial gains. I think with a 20 pip stop loss, one would have enjoyed a 50/50 win/loss ratio but probably a 75/25 profit/loss ratio taking a short entry 5 pips above the 200ema.
Click to expand...
Seems like your on the right train of thought. Trading with the trend, entering on a pullback to value on the moving average. Trading with 3/1 reward ratio. All good ideas.

"taking a short entry 5 pips above the 200ema."

Maybe using a turning point of an indicator back in the direction of the trend will further confirm the resumption of the trend and keep you out of the market during adverse retracements. Why would you want to trade somthing that is still retracing against the trend, wait for the price to start turning in the direction desired.

Do you have profit targets/ trailing stops. interested to know the exit strategy.

I remember the first system i developed myself used similar ideas 300ema and would have produced about 210R over a 6 month test on GBP/USD, only problem is that it was only 38% winners and would have had a 21 streak of losing trades.(Back to the drawing board).

regards

Mark


Nice to see a post worth reading that's not aload of dribble for a change.
 
No one Knows said:
Seems like your on the right train of thought. Trading with the trend, entering on a pullback to value on the moving average. Trading with 3/1 reward ratio. All good ideas.

"taking a short entry 5 pips above the 200ema."

Maybe using a turning point of an indicator back in the direction of the trend will further confirm the resumption of the trend and keep you out of the market during adverse retracements. Why would you want to trade somthing that is still retracing against the trend, wait for the price to start turning in the direction desired.

Do you have profit targets/ trailing stops. interested to know the exit strategy.

I remember the first system i developed myself used similar ideas 300ema and would have produced about 210R over a 6 month test on GBP/USD, only problem is that it was only 38% winners and would have had a 21 streak of losing trades.(Back to the drawing board).

regards

Mark


Nice to see a post worth reading that's not aload of dribble for a change.
Click to expand...

Hi Mark,
Thanks for coming back to me - much appreciated.
I've had three out of four winning trades this week using this as an entry signal on M5 chart.
Today at 11.55am BST, the GBP USD crossed just below the 200ema which was still showing an up-trend. I waited for the doji candle to close, and took a buy trade for 30 pips profit, closing the trade as the price crossed back below the 15ema. Stop loss was 15 pips behind the entry price.
On Tuesday, I had two winning and one losing short trades using the same entry.
I don't know if this is just luck, and will have to try it consistently - don't fancy a 21 losing streak!!. The key is to a) wait for an end of momentum candlestick to close - AND b) - to set a tight stop loss - because if the price doesn't reverse immediately it seems to carry on for some considerable distance - as you so rightly point out!

I've stripped out all other indicators off my M5 chart except a 200ema - to show trend direction (for the last 200 x 5 minutes), and a 15ema as a horizon for exiting the trade. I'm still only trading one lot size. I don't use the 15ema crossover as an entry - only as an exit. I'm having more success using support / resistance and the 200ema "bounces" as entry signals, with tight stops losses (max 25pips). I've found that waiting for MACD / sma or ema crossovers as entries is too lagging for my style of trading. I'm also mindful of support / resistance breakouts, and am looking for double tops/bottoms, and head and shoulder patterns. I scale back from 4hour, 1 hour, and 15minute charts to gauge overall market sentiment, and avoid trading before Medium and High impact news. I also look to see where price is in relation to the 200ema in longer time frames - exactly as per the excellent post on this site regading the 60ema - the three ducks method.

Exit strategies:
1) I set a Take Profit order at two legs of gain less 5 pips. So, price moves smartly into profit (Leg 1), reaches first support or resistance, pauses, moves sideways/backwards, then carries on - taking out my Take Profit 5 pips before the end of its (Leg 2)momentum. I gauge the size of each "Leg" based on recent price action - I know I'm not explaining this very well - but hope you understand!

or:
2) If price reaches first support/resistance, stalls, and comes back behind the 15ema - and 15ema changes against my position - I quickly exit the trade.

Basic stuff I know, but has been working well for the last three weeks - early days.....

Best Regards,
Alec
 
aleclaw said:
Exit strategies:
1) I set a Take Profit order at two legs of gain less 5 pips. So, price moves smartly into profit (Leg 1), reaches first support or resistance, pauses, moves sideways/backwards, then carries on - taking out my Take Profit 5 pips before the end of its (Leg 2)momentum. I gauge the size of each "Leg" based on recent price action - I know I'm not explaining this very well - but hope you understand!

or:
2) If price reaches first support/resistance, stalls, and comes back behind the 15ema - and 15ema changes against my position - I quickly exit the trade.

Basic stuff I know, but has been working well for the last three weeks - early days.....

Best Regards,
Alec
Click to expand...
Hi alec,

Because this is a very active short term system that you have developed it would produce 100's of trades over a 6 month period. Doing a backtest over 6 months could give you a good idea of the % winners, average win,average loss, expetencey etc. But with the very tight stop of 10 pips the % win will struggle to be above 50% i think.

I would do a sample becktest of a couple of hundred trades and figure out the MAE (maximum adverse excursion) on the winning trades and make your stop level a function of this, so that it allows the winners to be winners and cuts the losers short. Market noise is a major factor at these micro time period levels which is going to be
a problem for you.

Hypothetically say that this system is 50% accurate (after testing with 10 pip stop loss) with 2/1 win/loss ratio which is purely a function of your exit strategy.

Then over an average 100 trades, you will be +50R in profit.

(This next point is what im getting at about testing and stop losses)

If you then test the system with an improved stop loss and find that a 20 pip sl will increase accuracy to 75%, (this will change your win/loss ratio to 1/1)

Then over an average 100 trades, you will be +50R in profit.

Which system would you rather trade? both produce same profit on average.

The improved system would be much easier to trade as we all have the win bias, it would reduce the likelyhood of 10 losers in a row, equity curve would be alot smoother. And for the braver soul a more aggresive position sizing technique could be used.

Would you still want to trade improved stop system if after testing it was 70% winners and profit over 100 trades was 40R. Id have to consider taking the decreased profitability for the increase in reliability.

I realise ive gone well off topic here but its hard to stop typing once the creative juices are flowing.

regards

Mark
 
Last edited:
No one Knows said:
Hi alec,

Because this is a very active short term system that you have developed it would produce 100's of trades over a 6 month period. Doing a backtest over 6 months could give you a good idea of the % winners, average win,average loss, expetencey etc. But with the very tight stop of 10 pips the % win will struggle to be above 50% i think.

I would do a sample becktest of a couple of hundred trades and figure out the MAE (maximum adverse excursion) on the winning trades and make your stop level a function of this, so that it allows the winners to be winners and cuts the losers short. Market noise is a major factor at these micro time period levels which is going to be
a problem for you.

Hypothetically say that this system is 50% accurate (after testing with 10 pip stop loss) with 2/1 win/loss ratio which is purely a function of your exit strategy.

Then over an average 100 trades, you will be +50R in profit.

(This next point is what im getting at about testing and stop losses)

If you then test the system with an improved stop loss and find that a 20 pip sl will increase accuracy to 75%, (this will change your win/loss ratio to 1/1)

Then over an average 100 trades, you will be +50R in profit.

Which system would you rather trade? both produce same profit on average.

The improved system would be much easier to trade as we all have the win bias, it would reduce the likelyhood of 10 losers in a row, equity curve would be alot smoother. And for the braver soul a more aggresive position sizing technique could be used.

Would you still want to trade improved stop system if after testing it was 70% winners and profit over 100 trades was 40R. Id have to consider taking the decreased profitability for the increase in reliability.

I realise ive gone well off topic here but its hard to stop typing once the creative juices are flowing.

regards

Mark
Click to expand...

Hi Mark,

Wow - thanks, you've really given this a great deal of thought, and given me a great deal to think about. I'm going to take my time to digest all your points - and put the results into action.

You're right though about the danger of using a 10 pip stop loss. In practise, I'm actually using a 25 pip stop loss - but rarely seeing it taken out. I find that with a 25 pip SL in this time frame, I have time to consider the options if the price moves against me, and can generally stop my loss manually at 15 pips - this saves 10 pips of loss. I've spent around 9 months (6 months of live trading) watching how prices behave, and have developed a gut feeling for when a trade is not working as planned. Put simply, if the price fails to make a clean break of the 15ema, and reverses against my position, it's time to close the position quickly. Very often, the price will cross the 15ema, and reverse, but if the 15ema remains as a visual support/resistance for three or four candles, the price will generally continue into profit - not very scientific I know, but effective.

So I've taken 15 trades this week, for a net gain of just over 100 pips. I'm still trading a single lot size, and my objective by end of August is to increase to two lots per trade, giving me more options to close one lot at first profit target, and let the second run until 15ema is breached. This is the "more aggressive position sizing" you suggest.

Thanks for taking the time and trouble to offer your analysis of my strategy. That's the whole point of joining this forum, and there are several genuinely helpful guys with massive experience. I first came on for help as a complete newbie, and now as my confidence and results improve, I'm also happy to share my experiences with others - allbeit as a self confessed newbie!

Have a great weekend,
regards,
Alec
 
Interesting example there abello might have to look into the 200ema strategy abit further myself.

regards

Mark
 
more example of 200 ema
 

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more examples of today's trade
 

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