MTF-EMA Divergence Strategy:

In this strategy we use 3 Exponential Moving Averages (EMA) with EMA length of 20 EMA ,50 EMA, 200 EMA. Along with Multi Time Frame (MTF) Analysis. It Means, we analyse the trend in the longer time frame and take entry in smaller time frame. Usually this can be 1D-1hr, 4hr-1hr, 1hr-15min, 30min-5min anything like that until the time difference b/w the two timeframes is significant. To spot Divergence we use RSI (14) Indicator. With this Strategy we can get atleast win rate of 70%. The Higher the Time Frame the higher the win rate.

The main drawback of this strategy is we need to wait for lot of time to get entry signal. So, we will discuss multiple permutations and combinations of this strategy to create more strategies later.

Buy Entry:

Rule 1: In Higher Time Frame EMA 20 > EMA 50 > EMA 200 and the three EMA’s should be in parallel and should be pointing in upward direction. Meaning a clear Up Trend.

Rule 2: In Higher Time Frame, Price should at least pull back to EMA 50 (price < EMA 50). To get more entries we can relax the EMA20 > EMA50 rule at a cost of accuracy.

Rule 3: Now we Start Observing Divergences in lower Time Frame using the help of RSI (14).

Rule 4: After observing Divergence in Lower Time Frame, we search for any chart Pattern or break of trend line or Support, Resistance or any trend reversal signal for trade conformation. After conformation, we enter the trade aiming for atleast 1:2 Risk-Reward ratio. Stoploss at swing high of Lower Time Frame.

For Sell, Rules will be similar to that of buy.

Example 1:

Let’s take Example of Nvidia Stock which has gained traction now a days. Now let’s try to Identify the opportunities. From the below chart we can clearly see that EMA 20 > EMA 50 > EMA 200 in Daily time frame and are travelling Parallelly towards upward direction.

Now, we wait for price to pull back to atleast EMA 50. After that we switch to Lower Time Frame (in this case 1hr) for Divergence formation.

After spotting the divergence and waiting for any confirmation signal to enter the trade. In this case we confirmed the signal using Break of Structure (BoS).

We keep the SL at the Swing low of Lower Time Frame and aim for atleast 1:2 R:R In this case we got 1:3 and price is still continuously rising.

Example 2:

Now let’s take example of Tesla stock for Short Example. In this example we can clearly see that EMA 20 < EMA 50 < EMA 200 in 2hr time frame and are travelling Parallelly towards downwards direction. After couple of days, we observed Price > EMA 50. Now we start looking for divergence formation in Lower Time Frame and wait for confirmation to take the trade.

Here, we can spot the divergence and Break of Structure for conformation and SL at swing high in Lower Time Frame 15min. But as I said earlier the win rate of this strategy is arround 70% means, you will lose some trades.

As, we wait for more opportunities we got another entry in Higher Time Frame 2hr.

As earlier, we spot the divergence, wait for conformation keep SL at swing high and do our job with confidence. Let market decide the direction. In the below chat we can clearly observe the divergence and Break of Structure in Lower Time Frame of 15min. This time we hit our target.

Entry Variation:

This variation can be applied on any strategy. For this variation we use triple supertrend (explained this strategy in upcoming sections) with SuperTrend settings (21,1) (14,2) (7,3). All the rules will be same as explained in MTF-EMA Divergence Strategy. The only difference is in Step 4. After we hop down to Lower Time Frame (LTF), we wait for all the SuperTrend’s to turn green. After all the SuperTrend’s turn green, we enter the trade with SL at SuperTrend (14,2) (candle should close below SuperTrend (14,2) to exit the trade) targeting min of 1:2. Although we can get far more risk reward ratio with this method. This is the reason why we use this method to enter the trade. We can re-enter the trade after fresh Triple SuperTrend Buy Signal unless and until all the above rules are satisfied. But don’t enter when trend is too extended after pullback.

We will discuss about more entry variations of this entry type more in upcoming sections.

Example:

Let’s take the same chart as explained in MTF-EMA Divergence Strategy Example 1.

In LTF

Strategy Variation 1: MTF-EMA PullBack Strategy

The main difference b/w the Strategy 1 and this is that we don’t wait for divergence to form in Lower Time Frame. We just wait for reversal confirmation signal to enter the trade in the Lower Time Frame. The confirmation signal can be anything like price action, Market Structure, Chart Patterns, Trend Lines etc. All the other rules are similar to the Strategy 1.

Strategy Variation 2: Ema Divergence Strategy

The main difference b/w the Strategy 1 and this strategy is we do not use multiple time frames to enter the trade. Because if you want to scalping at 5min Time Frame using the Strategy 1 we need to use atleast 30min Time Frame as out Higher Time Frame. By using 30min as Higher Time Frame we will not get many signals for Scalping. So, we use only Single Time Frame to trade. The remaining all the rules are same as Strategy 1. Just to note, we draw divergence in the same time frame.

Strategy Variation 3: EMA PullBack Strategy

The main difference b/w the Variation 2 and this is that we don’t wait for divergence to form. We just wait for reversal confirmation signal to enter the trade. The confirmation signal can be anything like price action, Market Structure, Chart Patterns, Trend Lines etc. All the other rules are similar to the Variation 2.

Another variation of this strategy is when price < EMA 50 < EMA 21 we wait until price > EMA 50 < EMA 21. Means price crosses above EMA 50. Then we enter the long trade with SL at swing low targeting minimum 1:2 R:R ratio.

Note:

Make sure to backtest these variation strategies before live trading. Also note that these variation strategies might be not as accurate as Strategy 1. But provides more entry signals.