The strategy that we are going to discuss in this article is based on the indicators EMA Channel and Supertrend.
We already have discussed a standalone EMA Channel Strategy intraday trading strategy in our previous article. Anyone interested in that EMA Channel Intraday Strategy can read it here.
The exponential moving average (EMA) is a technical chart indicator that tracks the price of an investment (like a stock or commodity) over time. The EMA is a type of weighted moving average (WMA) that gives more weighting or importance to recent price data.
A ‘Supertrend’ indicator is one, which can give you a precise buy or sell signal in a trending market. As the name suggests, ‘Supertrend’ is a trend-following indicator just like moving averages and MACD (moving average convergence divergence). It is plotted on prices and their placement indicates the current trend.
In this strategy we will combine these indicators to generate buy and sell entries.
Chart Type: Japanese Candle Sticks
Indicators to be used: Exponential Moving Average (EMA), Supertrend
Setting Up Charts and Indicators
I will be using Investing.com’s charting to demonstrate this setup. We will be using a time frame of 5 mins and two EMAs of period 50. The one EMA should be added on the Price High and the other EMA should be added on the Price Low.
Now we will change the settings of EMA to length 50 (from default 9) and instead of close, we will set one EMA to High and the other EMA to Low of Price. Click on the settings (as shown in the above image ) icon of EMA to change these settings.
Similarly, we will add Supertrend Indicator and we will change the settings to length 5 and factor to 1.5.
Buying Rules
When Price Candle is Opens and Closes above EMA Channel and also when a Supertrend gives fresh buy signal, we can initiate buy above the high of candle closing above EMA Channel.
When trade is already running, the pullback towards EMA while Supertrend is still green can be used for fresh entry or pyramiding of the exiting trade.
Stop Loss: Initial Stop Loss can be below the low of candle closing above EMA Channel or previous swing low. Trail SL till price crosses supertrend in the opposite direction of trade taken. Keep SL and Target Ratio minimum 1:2.
Selling Rules
When Price Candle is Opens and Closes below EMA Channel and also when a Supertrend gives a fresh sell signal, we can initiate sell below the low of candle closing below EMA Channel.
When trade is already running, the pullback towards EMA while Supertrend is still red can be used for fresh entry or pyramiding of the exiting trade.
Stop Loss: Initial Stop Loss can be above the high of candle closing below EMA Channel or previous swing high. Trail SL till price crosses supertrend in the opposite direction of trade taken. Keep SL and Target Ratio minimum 1:2.
Additional Considerations
One can also consider the slope of the EMA Channel to take proper entry which will avoid unnecessary stop-loss getting triggered. For example, the Slope of the channel is upward, chances of success in this setup are high.
One should avoid a trade if the slope of the channel is flat, which indicates choppy (range bound) market conditions.
Disclaimer: Any information provided here is for educational purposes only. We are not responsible for any profit or loss incurred due to the use of this information. Please consult your financial adviser.
