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Adapting to Volatility.

Updated: Apr 10, 2023

Introducing the 10 and 20 EMA Crossover

2022 was a year marked by significant market volatility, presenting unique challenges for traders, including those following our stock strategy. In the past, our trading positions have been designed to keep us out of methodical market downturns, but the unprecedented fluctuations in 2022 required us to revisit and enhance our approach.

After an in-depth analysis of the market conditions, I introduced a new addition to our stock strategy - the 10 and 20 Exponential Moving Average (EMA) crossover on the S&P Index weekly chart. This broader market directional tool will help us gauge market breadth and provide valuable insights into the future direction of the market in the face of increased volatility.


Understanding the 10 and 20 EMA Crossover:

For those who may be unfamiliar, the 10 and 20 EMA crossover is a technical indicator that highlights short-term and intermediate-term trends in the market.


When the 10 EMA (short-term) crosses above the 20 EMA (intermediate-term), it's considered a bullish signal, indicating that the market is gaining strength.


Conversely, when the 10 EMA crosses below the 20 EMA, it's viewed as a bearish signal, suggesting that the market may be losing momentum.

The ‘Exponential’ component of the EMA puts more importance on recent price action enabling us to react quicker.

A simple back test here shows how applying it to the s&p 500 index alone, outperformed. Considering that 90% of fund managers fail to beat the index over a 10 year period (despite huge salaries) speaks volumes to its worth:

*Back test software: MarketInOut use Link - bit.ly/3oO1exN and code = FWSDM For a discount*


If we add a 12% trailing stop we can reduce drawdown further:


Why We Didn't Use the 10 and 20 EMA Crossover Before:

Previously, our stock strategy has been successful in keeping us out of market downturns without relying on the 10 and 20 EMA crossover. However, the unique volatility experienced in 2022 prompted us to reassess our approach and consider incorporating additional tools to better navigate these challenging conditions.

Why the 10 and 20 EMA Crossover Now?

Here's why I believe the 10 and 20 EMA crossover will be a valuable addition to our stock strategy in the current and future market environments:


Strong trend identification: The 10 and 20 EMA crossover captures both short-term and intermediate-term trends, helping us identify strong, sustained market movements.


Clear signals: The crossover provides a straightforward, visual representation of market trends, making it easy to interpret even for those new to technical analysis.


Decisive: Despite its visual representation and trend interpretation, It provides a mechanical rule, is it a trading window or not.

Moving Forward with the 10 and 20 EMA Crossover:

Incorporating the 10 and 20 EMA crossover into our stock strategy will help us better navigate volatile markets and address some of the challenges we faced in 2022.

Blue line is with new EMA requirement - Orange was prior - The declining end to the orange curve was largely 2022.


However, it's essential to remember that no single tool or indicator can provide a fool proof solution, therefore I must encourage you to practice proper risk management, setting stop-loss orders, managing position sizes, and diversifying your portfolio.

I'm optimistic that the addition of the 10 and 20 EMA crossover to our stock strategy will enhance our risk management in the face of ongoing market fluctuations, whilst staying agile and incorporating new tools like this, we can better navigate the complexities of the financial markets

Happy trading!



My breakout strategy - 19 page rule book (PDF) is available for all members to use.

My Breakout Scanner - https://bit.ly/3ea6sl8

My Brokerage Account (Interactive Brokers) - bit.ly/3TzhHFy

Back Test Software used above - bit.ly/3oO1exN




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18 commentaires


Membre inconnu
22 mai 2023

Hi Gareth,


I have a question. But first I thank you for the videos. What Are the tax ramifications for all the selling using the 10/20 strategies? plus what if you are interested in dividends ? how would that work? Sounds that the 10/20 you create a portfolio for an account that would be just using that strategy. Example- if you start the year with 500 shares of Apple and you accumulated 400 more then you have a cross over you would sell all. you would lose the dividends and you would be responsible for capital gains. Were as if you buy and hold you get the paid dividends quarterly, and you are Not paying capital gains.

J'aime
FinancialWisdom
FinancialWisdom
23 mai 2023
En réponse à

Hi - Personally I use it as a basis for my trading strategy only, i.e. I only place new trades when 10/20 EMA is positive, I don't sell when it is negative, I manage the trades as I would do normally. Therefore in that regard there is not a huge variance in what i do normally other than trading less by not trading on a negative EMA.


Hope that helps

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Tony
Tony
20 avr. 2023

powerful, many thanks @FinancialWisdom. I did some additional testing of this on Trendspider which covers 30 years and still get similar, slightly less optimal, results but the broad strokes are fully intact. One could go crazy backtesting all the variations (and running the risk of curve fitting*) but I think the main take away is the safety net this creates and the go signal on trades you pointed out. *Interesting piece on curve fitting: https://www.quantifiedstrategies.com/curve-fitting-trading/

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Tony
Tony
20 avr. 2023
En réponse à

absolutely @financialwisdomtv and I dont think this specific strategy falls into the over fitting category, I think its a 'loosely fitting jacket' as it should be. Just calling it out because people will have a tendency to look for an even better set up which may lead to over fitting. BTW kudo's for everything you have put together here, its an amazing body of work.

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Hi FW,

Thank you for your valuable article, video and your efforts.

Is it somehow possible to set up this strategy in (custom) MACD settings so that we get the MACD buy and sell signals exactly in the same time as 10 EMA/20 EMA happens?


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FinancialWisdom
FinancialWisdom
20 avr. 2023
En réponse à

Possibly, but i use it for the trading windows not for entry and exit

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nokia7210
nokia7210
04 avr. 2023

Hi Gareth ,

thank you again for your great support with videos and articles like this one . I have a question regarding this strategy , do you think work better with QQQ or SPY then stocks like AAPL or NVDA etc ?

Thank you

J'aime
FinancialWisdom
FinancialWisdom
20 avr. 2023
En réponse à

I think it works best for trading windows on a diversified fund, so qqq or spy

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Hi FW,

how this indicator 10,20 ema weekly work in conjunction with the weekly MACD ?


I understand they work in the same way. I purchased your strategy booklet, but it is not clear to me how to apply the new indicator in your strategy, especially when there are conflicting situations between MACD and EMA


tnx for your update

J'aime
MrPanatech
MrPanatech
26 avr. 2023
En réponse à

Hello Gareth, I am new to the forum, so not sure if this the correct place to ask these questions. After spending some time on the pdf and watchig most of your content, I am still not sure if there is a play by play application of your strategy, if so I would appreciate it if you point me to it.


So if the 10,20 ema are mainly to highlight the trading windows, what actually you suggest to use as entry and exits? Also, I am going to ascertain that your strategy is mostly for swing trading, but I wonder if could also be utilized for intraday trading.?


Thanks in advanced.

J'aime
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