On a daily chart plot the 21 ema.
Long trade:
When price crosses (rises) above the 21 ema enter long
When price is riding above the 21 ema stay long with the trade
When price crosses (falls) to below the 21 ema exit the long trade
Short trade:
When price crosses (falls) below the 21 ema enter short trade
Stay short as price runs below the 21 ema
Exit/Cover short when price crosses (rises) above the 21 ema
Reduce wiplash:
Price can often move above and below the 21 ema causing false signals (wiplash).
In order to reduce wiplash, use a 5 ema to smooth out the price fluctuations.
So then we get a 5/21 period ema crossover startegy
Follow the trend:
Trading in the direction of the trend is the key.
When 5 ema > 21 ema trend is up
When 5 ema < 21 ema trend is down.
When 5 ema rises above 21 ema, enter long
When 5 ema falls below 21 ema, can go short
10 ema - Early warning:
I find it useful to also add the 10 ema as well. I use the 10 ema as an early warning indicator,
I.E. When 5 ema drops below the 10 ema, it serves as an early warning signal that the uptrend is weakening and vice versa when 5 ema rises above the 10 ema, that the uptreand is begnning to gain strength.
When the 10 and 21 emas are far apart, I take action on 1/2 my position at the 5/10 ema cross and the rest 1/2 of the position at the 5/21 ema cross.
When the 10 and 21 emas are close together, I take action on the 5/21 ema cross.
Conclusion:
21 ema is your main trading indicator.
In addition, you can use the 5 ema as a proxy for price. The 5 ema does not produce too much of a lag.
I also use the 10 ema as an early warning mecanism.
For higly volatile securities, such as leveraged etfs, one can use the 21 ema on a 60 minute chart in addition to the daily chart.
