*Looking at the use of the 50EMA on multiple timeframes on the FTSE100 index*
Welcome back to the blog! In this blog post I am going to continue on with this weeks theme which is trading using moving averages, in particular the 50 period exponential moving average (EMA). On Monday I shared with you an existing blog post that looked at the different moving averages, their uses and how I personally incorporate them in to my technical analysis.
You can read that blog post by clicking on the link below.
As it stands, I am actually not entered in to any FX currency trades and there is a very good reason for this… I haven’t found any good trade set ups that I like enough to warrant risking capital. It is perfectly acceptable to not be holding any trade positions. Most trading strategies will not always produce trade set ups every day of every week and it is important not to skew away from your rules and start taking lower quality trade set ups. This is where you will begin to take unnecessary losses.
I am however still holding 3 other trades.
- Trade 1 – Dow Jones short trade.
- Trade 2 – Tesla stock options put spread trade.
- Trade 3 – FTSE 100 short trade(s).
I much prefer the look of trading equities over FX currencies right now because FX volatility is now significantly higher than stock market volatility (VIX). This is shown on the chart below.
The chart above shows the VIX Index vs the JPMorgan Global FX Volatility Index. This can then be used to quantify and compare Volatility of 2 separate markets. The VIX represents the stock markets calculated from the S&P500 and the JPM FX “VIX” represents global currencies. As you can see on the chart, in the near term from late July until now, FX volatility has rocketed from around 7.0 up to the current levels above 9.0. This is an increase of almost 30% where as stock market volatility has continued to drop.
It is mainly USD weakness that is pushing this and traders are uncertain of what is to come considering the global increase in money supply of all currencies but in particular the majors and the USD which is the global reserve. I personally cannot see why Euro or GBP deserves strong buying but when traded against the Dollar and the Fed’s unprecedented money supply, it makes sense. It is currently a case of buying the weak vs the weaker.
Now let’s get back to the FTSE100 index chart and apply the 50 EMA and the 200 EMA to multiple timeframes to compare them. I will talk you through exactly what I see on each timeframe.
I believe the daily timeframe chart shows the best technical view of why I am shorting this stock market index. You can see that for a number of years the FTSE has been basically flat and since the start of this century (the year 2000) it has only gained a maximum of 25% at the all time highs.
The coronavirus pandemic sell off broke through all EMA’s and supporting bullish trendlines and caused the daily 50EMA to cross below the 200EMA which is a shift in trend. Since the sell off there as been a slight recovery and then multiple weeks and months of consolidation and price “chop”.
The important thing to note is that price broke below the 50EMA on the sell-off back in February 2020 and is quite obviously testing and rejecting the daily 50EMA at the current level. It looks to be holding strong as a new dynamic resistance for price. There is a very good chance, in my opinion, that this will be a lower high here.
The 4hr chart isn’t great for analysis in terms of trading opportunities using the EMA’s because price is quite clearly range bound and reasonably choppy. That being said, you can use this chart as an example of how EMA’s can become ineffective and the moving average based trading strategies will not always produce trade entries or effective trade entries anyway.
When markets become condensed and start to move sideways for extended periods of time you will start to see the 50EMA and 200EMA move closer together and start to cross each other back and forth. This can lead to multiple false and ineffective trade entry signals. I will talk more about this later.
However, on this chart you can see both of my short trade entries, where the original one was a simple is a support/resistance zone trade. The use of an EMA was not included in my analysis because of the points I mentioned above.
The 1hr timeframe chart is my favourite intraday timeframe to use when trading the 50EMA. It produces the most efficient trade entries for me because I can get in with reasonably tight stop losses to produce good reward:risk ratio trades and the duration of trades isn’t too long or too short.
As you can see, my most recent short trade position entry on the FTSE100 is after price broke below the 50EMA and came back to retest it and bounce. I entered short around 6125 with a stop loss above the highs and price has now continued to go lower. Today there were further retests and rejections of the 50EMA where price has bounced off of it and closed lower.
I do also use moving averages when day trading and I cover this in more detail in my Mastering The Markets – Retail Trading Course.
Limitations of using moving averages.
The main limitation of using moving averages is that they are a “lagging” indicator. This means that they are produced by historical prices and therefore will always be behind the current market price. This is partly why I prefer to use the exponential moving average because it is weighted towards more recent prices to make it more relevant.
Moving averages work a lot better in trending markets vs choppy markets and in that sense, they can therefore be used to determine the type of market structure present. You can then use this to your advantage when using trading strategies that might only work in a range bound or trending market.
For example, if you know you only produce good returns in trending markets and you notice the 50EMA and 200EMA beginning to converge on one another and start to cross each other back and forth, you then know that it might be time to stop trading that asset or security for a while.
Moving averages do work well in technical analysis but always use them with other points of analysis. Just using moving averages alone will not always produce good trades.
If you are interested in learning my personal trading strategies, please consider my Mastering The Markets – Retail Trading Course. Head over to my Trading Education page to check out all of my education packages and the deals available.
All my technical analysis is done using the TradingView platform. You can get access via the link below.
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DISCLAIMER: None of the information posted on this site is to be considered investment/financial advice. Trading is high risk and you should only trade with money you can afford to lose.