How to use EMA Clouds
To load these EMAs on your chart first create a new Thinkscript from THIS PAGE
EMA clouds are nothing more than shading the area between two moving averages to remind you of the current trend of the market. This can be extremely useful in helping trade with momentum and preventing you from taking counter trend trades. In this specific script I am using the Exponential Moving Average. When the 5EMA crosses below the 20EMA the cloud will be shaded red; and when the 5EMA crosses above the 20EMA the cloud is shaded green.
EMAs represent a smoothing out of price over a given time period showing you if the current price is above or below the average price for that time period. For example; the 5EMA displayed on the 5-minute time frame will show you the average price over the last 5 (5-minute) bars. The 20EMA displayed on the daily-time-frame will show you the average price over the last 20 daily bars.
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Important note!
You have full customizability over changing the EMA lengths and the color of the cloud in the script I provided. Feel free to experiment, however the process I am outlining here uses the default settings in the script you copied from my site displayed on the 5-minute time frame.
EMA Convergence and Divergence
The power in EMA clouds comes from their easy visualization of convergence and divergence.
Convergence can be seen when an EMA representing a smaller time period (5EMA) approaches or crosses another EMA representing a larger time period (20EMA). This means the short term trend is changing when the long term trend is relatively the same. This is what we call convergence.
Converging EMAs are generally a sign of a weakening trend can help us spot potential changes in momentum earlier and provide opportunities to capture larger price movements.
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Divergence is the opposite of convergence. EMAs expanding or moving away from each-other show that a trend is strengthening and this would be an opportunity to enter a trade or add to a current position.
In general we want to only enter a trade when we start seeing divergence between the 5 and 20EMAs. This will help us not get caught up in fake-outs and provide a higher probability of a solidified shift in momentum. It is this exact reason why I introduced the 50EMA as my final criteria for a valid trade entry signal.
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