So how do you know if the markets are trending or not? But when markets get volatile and choppy its best to focus on more mean reversion trading that looks for prices to revert back to its key moving averages from extended levels. I can look to the 21 EMA as a pullback buy point in a trend that is showing signs of setting up for a breakout, and often in a very strong existing trend, buying dips to the 8 EMA is a great way to enter into an ongoing trend. I might look at trading trends when the market price structure is clearly pointing to trend continuation and upsloping moving averages are often the best way to see this in an uptrend. I trade a variety of strategies based on whatever the current market environment dictates.
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How to Identify Trends Using the 8/21 EMA This gives you an idea of where price has been on average in the past month.
Sometimes up to a month as well which coincides nicely with the 21 day moving average as there are roughly 20-21 trading days in an average month.
Some people use 5 EMA’s for a very short term look at trend but I have always liked the 8/21 EMA set of moving averages to determine trend because I am usually focused on trades anywhere between a few days to a few weeks. There is nothing special about those amounts of measure, you can use a 10 period EMA and a 20 period EMA but I like the fibonacci based numbers which include 8 and 21. This is the backbone of my trading on most timeframes as it combines both the shorter term 8 EMA and slightly longer term 21 EMA. Understanding where these averages are can help you see how extended a stock is in the short term and whether it’s ripe for a retracement back to its mean, aka average.
One of the trading concepts I refer to a lot is where a stock price is in relation to its 8 and 21 period exponential moving averages (EMA’s).
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