Confirming The Trend
Here is where we get to the goods, the actual techniques used to trade with the trend.
The first question you might have is “do we need a divergence setup to trade with the 21 and 55 EMAs”, and the answer to this is no. We are taking advantage of a trend, so I will show you how to capitalize on the market’s ability to move with the trend.
Hidden Divergence is an awesome tool, but as a trend continues, there are more opportunities to enter the market than Hidden divergence will always allow for.
First, the beginning of a new trend direction is when the 21 EMA crosses over the 55 EMA. When 21 crosses above, we have the potential start of an upward trend, when the 21 crosses below the 55, we have the potential start of a downward trend. I say “potential” because even though we get a crossover of the MA’s, we don’t always get a trend that forms from it.
Next, we look for confirmation of the new trend. What we look for is a bounce off one of the moving averages. When the 21 crosses up over the 55 to begin a new uptrend, we want price to drop back down to either the 21 or 55 and use it as support. This is confirmation that that new upward trend has formed.
Below you see an image of the 21 EMA crossing over the 55 EMA signalling the potential for a new trend, and then we get a bounce off the 55 EMA confirming the new trend.
Prior to the chart example above, below you see three examples of the 21 EMA crossing over the 55 EMA, but in each case, we do not get the confirming price bounce off either of the moving averages. Price simply crosses back across the EMAs never using them as either support or resistance.
Next post we will show you how to trade and follow the Trend Line ….