Trend following is a key principle of technical analysis, focusing on trading in the direction of the prevailing trend. Identifying trends and reversals can be challenging, but traders use price structures—Higher Highs and Higher Lows in an uptrend, Lower Highs and Lower Lows in a downtrend—or analyze price action to make informed decisions.

These methods are complex and may become subjective at some point, so traders use indicators like Moving Averages or the Super Trend for a more objective approach. These tools provide a clear framework—price above them signals an uptrend, while price below indicates a downtrend. In today’s newsletter, we will explore a powerful trend reversal signal: Moving Average crossovers.

Moving Average and trends

The Moving Average (MA) is a versatile trend analysis tool that helps traders identify market direction by observing its relationship with price. By plotting multiple MAs with different periods, traders can analyze trends across various timeframes and adjust periods to gain deeper market insights for informed decision-making.

Popular MA settings are:

• 9-period MA – Ultra-short-term trend

• 21-period MA – Short-term trend

• 50-period MA – Medium-term trend

• 150-period MA – Intermediate-term trend

• 200-period MA – Long-term trend

These Moving Averages (MAs) are typically plotted on the daily timeframe, providing traders with a clear view of multiple trends within a single chart. In this analysis, the Exponential Moving Average (EMA) will be used instead of the Simple Moving Average (SMA) due to its greater responsiveness to recent price action, making it a more effective tool for identifying trend changes in real time.

Crossovers in EMA

A crossover generally refers to the point where one element moves past or intersects another, indicating a shift or change. In trading, it refers to intersection and subsequent shift of the MA lines. There are two types of crossovers in technical analysis:

• Bullish Crossover (Golden Cross) – This occurs when a short-term moving average crosses above a longer-term moving average. It signals a potential upward trend.

• Bearish Crossover (Death Cross) – This happens when a short-term moving average crosses below a longer-term moving average. It indicates a potential downtrend.

Popular sets of EMA used are:

1. 9- and 21-day EMA: For short term trend

2. 21- and 50-day EMA: For medium term trend

3. 50- and 150-day EMA: For intermediate term trend.

Some experienced traders even use 50-, 150-, and 200-day EMA to gauge the long-term trend reversals in potential stocks.

If looking at price and a single EMA is enough to gauge the trend, why use two EMAs? The answer is confirmation.

In the chart, the red line represents the 9-day EMA, and the black line represents the 21-day EMA. At point 1, the price dipped below the 9-day EMA, but confirming a downtrend would be premature as there was no crossover. At point 2, a death cross between the 9-day and 21-day EMA signaled a short-term downtrend. At point 3, a golden crossover indicated a short-term reversal, offering a trading opportunity. Finally, at point 4, another death cross confirmed a return to a short-term downtrend.

In the previous chart, what if the trader wanted to take trades and hold them for a period of few weeks or months on the bullish side? Would the crossover between 9- and 21-day EMA be enough for confirming? The answer is no. To confirm medium term trend change, we would apply the 21- and 50-day EMA sets.

Observe the chart below, where the blue line represents the 50-day EMA, and the black line represents the 21-day EMA. At point 1, a death cross confirmed a medium-term downtrend. However, at point 2, there was no golden crossover between the 21- and 50-day EMAs. This indicates that despite the price being above the 21-day EMA, taking trades and holding them for several weeks or months would not have been a reliable decision.

Using EMAs in this manner provides a fresh perspective on trend analysis and allows traders to plan their trades in advance, particularly when analyzing broad market indices like the Nifty 50. If you find this approach to EMAs insightful and wish to learn technical analysis from the ground up, consider the TNT One subscription. It grants access to a comprehensive library of courses and webinars on The Noiseless Trader website, along with weekly sessions. Click on the poster below to explore the TNT One page.