We are optimizing the EMA 10/20 Strategy!

Last Updated: 21. November 2023By

Yesterday I showed you a trading strategy that should help you beat the markets. The strategy invests when the EMA 10 crosses the EMA 20 on a weekly basis. You saw that it works well until the markets start to become volatile and produce false signals.

That can always happen once in a while. Show me a perfect trading system! But more importantly, it needs to be profitable in the long run. But how can we make this system even better? I have come up with a way to get more out of this strategy.

Oh, one more thing I need to say: The strategy works best with slow-moving values like an index. Tesla or cryptocurrencies are not ideal, although it can still work. The less drastic the movements of the value, the better. We therefore want to see as boring a price movement as possible.

The Problem of the EMA 10/20 Strategy Sure, we’re complaining a bit at a high level with a strategy that beats the indices in the long run. But yesterday we saw that especially after a crash, the weighted average lines take ages to cross again on a weekly basis. So the buy signal comes much later. That’s annoying.

Can we optimize this by taking shorter averages? Instead of 10/20 maybe 5/15? This does not work well with the S&P 500 and DAX. We get significantly more false signals. But of course we get in much earlier after a crash. Does that make us happy?

Crashes don’t come around all the time. So a system should perform better in “normal” market phases. No matter what numbers I use instead of 10 and 20, we never solve the problem of the delay after a crash. If there is a rapid recovery after the low point, we look into the tube for weeks with this system. That’s obviously not a screw we should turn. This system is absolutely not suitable for a quick entry after a strong sell-off.

How to Improve the Trading System After a crash we won’t win any prizes here. So the alternative is that we better exploit long-term trends. I see a good opportunity here. If you want to stay in the weekly chart, increase your position when the prices turn around towards the EMA 20. This works in both directions – short and long.

Sometimes the trend is so strong that only the EMA 10 is reached. Then you have to add there. That was honestly only the case after the Corona crash and in the DAX. With less volatile markets, the EMA 20 is even undershot and then it continues to go up. That was the case with the S&P 500 between 2016 and 2018.

The last stretch down from January 2022 to October 2022 was particularly suitable for this, for example. The following weekly chart shows this.

(Source: Tradingview.com)

The prices reached the green EMA 20 three times and then turned south again. Here we could have increased our position each time. That would have made the trade even better overall.

The work intensity is something else. After the short trade was opened in February, we could add in June, August and September.

The only question left open is when to close the bag and take the profits. Maybe I’ll come up with something in the next few days. In any case, we would then have a system that we can test on most indices and sluggish stocks. It may even fit for some commodities.