Friday, January 20, 2012

The first close beyond the ema

The 20 bar ema is the only indicator Brooks Price Action uses but this gives several signals including G, G2 and A2. In addition there is one tiny bit of information that it reveals thats very useful to price action traders. In many respects, ema is a barrier like a trendline, swing point, high and low of the day or prior day and so is subject to fBO and BP trades. In general, an A2 can be seen as a 2 or 3 legged fBO of the ema.

The ema represents a sort of average price and many traders and algorithms like to enter at a better than average price. So the first time the price touches the ema in a very strong trend, its likely to find support. Many traders (and algorithms) will only make a decision on the close of a bar, which gives us some clues about how the price reacts after closing beyond the ema.

The first close above the ema (b12) should find sellers. This implies any signal bar here is likely to have some follow through, especially a 2 legged LH such as b13. Often, a close beyond the ema is on a strong breakout bar and will result in a small or weak pullback bar (b31). This is a sign of strength and implies continuation. If the close after the ema breakout bar does not close reverse below the ema, it should be always be taken as a sign of strength.

Two or more closes beyond the ema should be seen as a sign of strength even if a pullback bar later reverses the BO (b55), the likelihood of the move continuing at least for a while is high. The only caveat is that BW often fails to obey these rules so its most useful when the market was recently trending.


  1. Cad,
    Is b63 a tradable BT of b26/27? Pullback was to the exact tick but leg down since b48 was quite tight.

    1. b63 was an excellent setup for various reasons. In addition to the BT, it was a 2 or 3 legged deep pullback after a very strong trend. Inspite of being a tight channel, b62 was possibly a BW BO that is likely to fail and possibly a FF.

  2. this lesson fits nicely with several others you've explained. e.g, the failed A2 and the tendency for 1 legged returns to the ema to move past it whereas 2 legged moves tend to continue the previous trend.
    the first bar to cross and close above the ema is the setup bar, the next bar is the signal bar I think. when price closes above ema, this bullish SB would indicate entry in the direction of the cross; a bearish SB suggests to enter short.

    1. I would caution against using purely the second close after the ema as a signal. Check b23 on 2012-1-13. While useful as a directional filter, you still need to wait for a proper setup, preferably a deep pullback.

  3. Hi Cadaver,

    I would go long above b9 and b26, but after b10 and b27 bear inside bar I canceled my orders. Its ok to hold order or is better cancel order in this situations?

    Could be b28 considered as second entry long and b48 as a fBO?

    Could you tell me your opinion about take a entry (today b5) before report with high impact?

    Thank you very much for your reply.

    1. A signal bar is that attractive it should trigger and if it doesn't usually there is a reason, so I usually cancel.

      Second entry to me implies the first entry triggered and gave a second setup at the same price. b28 was an OIO type reversal, which is just a reversal bar on a higher timeframe and therefore a valid signal.

      b48 is a classic fBO and 1tf.

      About reports, I try not to know when a report is due but I will not trade a questionable signal bar. Some folks prefer to stay flat before a report and would rather miss a large move, but if the signal bar is good (average size bar, strong close, no overlap), I'm usually going to take the trade. Sometimes this means slippage and a larger than expected loss but unless the market has been extremely volatile recently, your chances are good that you wont have significant slippage on a high volume instrument like ES.

  4. Hello cadaver
    Just wanted to say thank you for your time and market wisdom, it is greatly appreciated.