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Adapting to Volatility.

Updated: Apr 10

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 - 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.

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