9 EMA Trading Strategy – Does It Work? (Rules, Setup, Performance, Backtest) (2024)

Home Moving average strategies 9 EMA Trading Strategy – Does It Work? (Rules, Setup, Performance, Backtest)

The 9 EMA trading strategy is a widely used technical analysis indicator strategy among traders to identify short-term market trends. It involves the use of the 9-period exponential moving average to generate buy and sell signals. The strategy is easy to implement and can be applied to financial instruments like stocks, forex, and commodities. Let’s take a look at the 9 EMA strategy.

The 9 EMA strategy involves using the 9-period Exponential Moving Average to make profitable trades in the market. This may include utilizing techniques such as risk management and adjusting the size of trades to maximize returns.

In this post, we answer some questions about the 9 EMA trading strategy, in addition to backtest it with specific quantifiable trading rules.

Related reading: – Are you looking for other moving average trading systems? (We have plenty more)

Introduction to the 9 EMA Trading Strategy

The 9-EMA strategy is a technical analysis strategy that uses the 9-day exponential moving average (EMA) to generate buy and sell signals for trading securities. It uses 9-EMA to identify short-term market swings in the price of a security. EMA gives more weight to the recent prices, which can help traders to accurately identify market swings.

In this strategy, a buy signal is generated when the price of a security moves above the 9 EMA, and a sell signal is generated when the price moves below the 9 EMA. The strategy can be applied to several securities, such as forex, stocks, and commodities.

Here’s an example:

The chart above in Bitcoin shows the 9-day EMA in red and green arrows show when the close crosses above the EMA line, and the red arrows show when the close crosses below.

9 EMA Crossover strategy (backtest) – does it work?

Let’s look at some potential 9 EMA trading strategies backtested with specific setups and trading rules:

9 EMA crossover system

Let’s first backtest a crossover system that has the following trading rules:

We employ the rules on Bitcoin, and we get the following equity curve:

There are 284 trades with an average gain of 2.65% per trade. Not too bad, and we avoid most of the gut-wrenching drawdowns (max is 83%).

What happens if we use the same strategy on S&P 500/SPY?

This is a pretty ugly equity curve! Of course, no sane person would start trading this (we hope).

The charts show that the 9 EMA trading strategy works well in trending assets like Bitcoin but fails miserably in mean reversion markets like stocks.

9 EMA strategy, including an indicator

Let’s add another indicator: the 200-day moving average as a trend filter. We make the following trading rules:

• When the close crosses above the 9-day EMA and the close is above the 200-day simple moving average, we buy at the close.
• When the close crosses below the 9-day EMA, we sell at the close.

For Bitcoin, we get the following equity curve:

The number of trades goes down significantly: From 284 to 153, but the average gain per trade is a solid 4%.

Does the added filter help us generate a better S&P 500/SPY strategy?

Yes, it’s an improvement, but still not tradable, unfortunately.

Benefits of the 9 EMA Trading Strategy

A moving average can be a useful tool for a trader:

• It can help traders to spot trend changes in the market easily.
• The 9 EMA is a simple indicator that can be used to trade any financial security.
• It can generate buy and sell signals.
• The 9 EMA can be easily tweaked and used in conjunction with other technical indicators for optimum performance.

Key Components of the 9 EMA Trading Strategy

• The indicator: The strategy uses the 9- period Exponential Moving Average (EMA), which can identify the short-term trends in the market.
• Buy and Sell Signals: It generates buy signals when the price of a given security is above the 9 EMA, and sell signals when the price is below.
• Risk management strategy: This would include position sizing and stop-loss orders.

Steps to Implement the 9 EMA Trading Strategy

• Select Security: Decide which security you want to trade, like stocks, futures, options, or currencies.
• Create your strategy rules: Code your strategy and specify the rules for buying and selling the security.
• Backtest your strategy: Test the strategy on historical data to know how it would have performed in the past.
• Forward-test with a demo account: If it is a scalping or intraday strategy that can be tested in a short time, trade it on a demo account first. We recommend putting the strategy in “incubation” for at least 12 months before you commit real money.
• Go live with a small amount: Start with a small account and gradually grow the account. Always start small!

Risk Management Strategies for the 9 EMA Trading Strategy

• Stop loss orders: Traders can set stop loss orders at a certain level below the entry price to limit potential losses if the trade goes against them. However, we are very skeptical of using stop loss orders, read here for why you should use alternatives to a stop loss.
• Position sizing: Traders can limit their risk by controlling the size of their trades based on their account balance and risk tolerance.
• Diversification: Diversifying a portfolio by spreading risk across multiple financial instruments and markets can help offset losses if one market or instrument underperforms. We believe the only Holy Grail trading strategy is diversification.
• Take profit: Traders can set a take profit level, which is the level at which the trade will be closed if it reaches a certain amount of profit.

Advantages and Disadvantages of the 9 EMA Trading Strategy

Advantages of the 9 EMA Trading Strategy:

• Responds quickly to price changes and identifies short-term trends.
• Can be used on various securities and markets.
• Is simple to implement.

Disadvantages of the 9 EMA Trading Strategy:

• It generates many false signals.
• It does not take into account market conditions.
• It does not account for major news events.
• Doesn’t work on many assets.

Examples of Profitable Trades Using the 9 EMA Strategy

Some examples of profitable trades generated by this strategy in the different markets are shown in the charts below:

Chart 1. Shows the 9 EMA used in conjunction with the RSI oscillator to generate and confirm trade signals. A sell signal was generated when the price is below 9 EMA and RSI pulling from overbought is the confirmation to enter the trade.

Chart 2. Shows the 9 EMA used to generate signals in the Gold market. Buy and sell signals are indicated on the chart below.

Common Mistakes to Avoid When Implementing the 9 EMA Strategy

• Neglecting risk management: Oftentimes, traders focus more on profit and neglect the use of risk management strategies when entering trades.
• Not having a trading plan: It is important to have a plan in place before entering any trade because a trading plan helps a trader to have a clear path of execution in the market. You need to backtest a trading strategy before you start trading real money. How else do you know if this is a profitable trading strategy?
• Relying only on the 9 EMA: Traders relying solely on the 9 EMA without checking for additional confirmations may be susceptible to whipsaws and false signals.
• Over-leveraging: Leverage should be adjusted according to the volatility of the market because high leverage in a volatile market can have a devastating effect on a trader’s equity.

How to Use the 9 EMA Strategy to Reduce Risk

To reduce risk when using the 9 EMA strategy, traders can use proper risk management techniques such as setting stop-loss orders, adjusting position sizes, and diversification. It’s also important to have a well-defined exit strategy, not to over-leverage, and to avoid emotional trading

Tips to Optimize the 9 EMA Trading Strategy

To optimize the 9 EMA strategy, traders can use other technical indicators such as RSI or Bollinger Bands to confirm signals, pay attention to market conditions and volume, and use proper risk management techniques.

How to Identify the Best Entries and Exits Using the 9 EMA Strategy

The 9 EMA strategy generates buy signals when the price moves above the 9 EMA line and sell signals when the price moves below the indicator.

Traders can also use other technical indicators, such as RSI or Bollinger Bands, to confirm signals. Volume data can also be used to confirm the strength of the signal before making any trades.

What Indicators Can Be Used in Conjunction with the 9 EMA Strategy?

Indicators that can be used in conjunction with the 9 EMA strategy include:

• RSI
• Stochastic
• MACD
• Bollinger Bands
• Volume
• Fibonacci retracement
• Support and resistance levels
• Candlestick patterns

How to Combine the 9 EMA Strategy with Other Trading Strategies

The 9 EMA strategy can be combined with other trading strategies by using the 9 EMA as a filter for entry and exit signals generated by other strategies. For example, a trader can use the 9 EMA to confirm a trend identified by a longer-term moving average or to confirm a breakout identified by a support and resistance strategy.

Also, you can use other indicators such as RSI, MACD, and candlestick patterns in conjunction with the 9 EMA strategy to have additional confirmation of trades.

What Types of Markets Can the 9 EMA Strategy Be Used In?

The 9 EMA strategy can be used to trade in various markets such as the stock market, commodities futures market, options market, forex market, and crypto market.

That said, it most likely doesn’t work in the stock market. The reason is simple: stocks tend to revert to the mean, thus leading to many whipsaws. You need to use a longer lookback period for it to work in the stock market, for example, the 200-day moving average strategy.

What Are the Most Popular Variations of the 9 EMA Strategy?

The most popular variations of the 9 EMA strategy include:

• Combining the 9 EMA with other indicators such as RSI, MACD, and candlestick patterns
• Using multiple EMAs with different periods to identify trends in different time frames
• Using 9 EMA in combination with other strategies such as support and resistance, Fibonacci retracement, and price action patterns
• Using different periods for EMA such as 5, 10, 12, 20, 50, 100, 200
• Using different timeframes for the strategy

9 EMA trading strategy – conclusion

We ended the article with a couple of trading strategies to give you an idea of how the 9 EMA strategy can be used. Such a short moving average only works in assets that trend or show short-term momentum. Thus, it excludes most of the assets.