EMA Crossover Trend Following Strategy

Overview

This strategy is a simple trend following strategy based on EMA crossover. It uses two EMA lines with different parameters, a short-term EMA line and a long-term EMA line. When the short-term EMA line crosses above the long-term EMA line, go long. When the short-term EMA line crosses below the long-term EMA line, close position. With stop loss and take profit to manage risk.

Strategy Logic

EMA indicator is a trend following indicator which exponentially smoothes price. The short-term EMA line responds faster to price changes, reflecting recent trend. The long-term EMA line responds slower, reflecting long term trend. When short EMA crosses above long EMA, it indicates the recent upward momentum is stronger than the long term trend, can go long. Vice versa, when short EMA crosses below long EMA, it indicates the recent downward momentum is stronger, should close long position.

This strategy sets 9 period and 21 period EMA lines. Use the crossover of 9 period short EMA and 21 period long EMA as trading signals:

1. When 9 EMA crosses above 21 EMA, go long
2. When 9 EMA crosses below 21 EMA, close position

Advantages

1. Use EMA crossover to form trading signals, avoid over-trading
2. EMA smoothes price, helps identify trend direction
3. Simple and easy-to-understand logic

Risks

1. EMA has lagging effect during volatile markets, may cause losses
2. Rely solely on single indicator, prone to false signals

Risk Solutions:

1. Optimize EMA parameters for faster response
2. Add other indicators for signal filtration

Optimization Directions

1. Optimize EMA periods, find best combination
2. Add volume or other indicators for filtration, avoid false signals
3. Add dynamic stop loss and take profit

Summary

The strategy capitalizes on EMA crossover of two EMAs to follow trends. Its advantage is simple logic, medium trading frequency, catching mid-to-long term trends. However EMA has lagging effect. Adding more indicators for filtration and optimising dynamic stop loss can reduce risk further. Overall, EMA Crossover is effective from seizing mid-to-long term trends.