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Mastering EMA Crossovers for Profitable Swing Trading in Volatile Markets + [Backtesting $DIS]

Updated: Oct 15

One of my favorite strategies of all time is the 8/21 EMA Crossover on the 1D/5M chart. The markets were choppy with CPI today, but you can still use moving averages, or in this case - exponential moving averages, to help gauge where the markets are headed. As far as the 8 and 21 EMA go, there is really nothing special about those amounts of measure. You can use a 10-period EMA and a 20-period EMA, but I like the Fibonacci-based numbers, which include 8 and 21. I feel as though you can get a tighter break during times of high volatility.

Besides the 8/21 EMAs, I really only use RSI, which is relative strength, to monitor when price is overbought/oversold, SuperTrend for short-term reversals, and of course, VWAP, which is essentially floating support and resistance determined by volume. Honorable mentions that I'll peek at here and there include MACD, Fibonacci retracement, Bollinger Bands, Stochastic Oscillator, and TTM squeeze, but too many indicators create too much noise, so pick wisely. In addition, I'll almost always be monitoring IV (implied volatility) and it's relation to a trades possible theta decay. While I've been focusing more on trading index ETF's recently rather than individual stocks, today I decided to trade Disney. As far as this example today with $DIS, let me be the first to say I like Disney, especially down here at 2014 prices, and and I've been dollar cost averaging it into my long-term portfolio. Regardless, it ran up too fast the past week, and the downtrend is still upon us. When broader markets were weak, I was expecting $DIS to give back some of last week's gains, and they did. I'll usually buy the first or second strike OTM (out of the money) and only about 0-3 DTE (days until expiration) on these contracts. I was already eyeing a short on $DIS and after the weak 8/21 cross up failed to hold and it was frothy, I started eyeing the specific play. Then I jumped in on that top tick at 11:15am with the $84 Puts expiring EOD tomorrow (10/13). Soon thereafter, broader markets started rolling over midday and $VIX subsequently popped, which helped accelerate premium growth, and once I got that EMA Crossover to the downside- I was holding for gold.

Because premiums juiced up fairly quickly, I wanted to squeeze the contracts for what they were worth. About an hour or so later and they were up over 100%, and $SPY/$QQQ had already shed some serious blood, and a rebound was impeding, so I closed out at what turned out to be the low of the day for $DIS. I was buying these contracts for around $25 at a piece 11:30am and selling them at for $75 a piece by 1:30pm. Now, I could've held overnight if I wanted to, but it's almost always better to take profits on the big move up (or down in this case). If I were to wake up tomorrow (Friday) and still have those calls expiring EOD, and I didn't get a downward move in my favor, then theta (which measures the inevitable loss in value options experience over time) will start decaying like wildfire and could also get IV crushed; If IV drops sharply mid-morning, I risk losing money on my options position even if the price of the underlying stock doesn't move against me. This is because the value of options decays over time, and the rate of decay is faster when IV is low. In addition, my contracts could also expire worthless or close to it and in that case I would've been buying something for $25 each on a Thursday and then trying to sell them the next day for $1. If any news for $DIS came in overnight or a whale came in and scooped the 9-year low and it pumped at the bell, my positions could evaporate faster than I'd be able to sell them. Therefore, always proceed with caution and only risk what you can afford to lose because with options trading- it's literally that. Also, have somewhat of an exit strategy and take smaller gains to avoid losses, small or large.

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