Distance from the 200 EMA on M15 as a stretch filter before I fade anything

[Fairman]

Distance from the 200 EMA on M15 as a stretch filter before I fade anything

I like having a check against fading moves that are really part of a bigger trend. The 200 EMA on M15 gives me a rough sense of the larger direction, and the distance from it tells me how stretched price is.

When price is close to the 200 EMA, I'm comfortable with range or pullback trades in either direction because there's no strong bias. When price is far from it, in one direction, I'm cautious about fading. It's a strong move, and the chance that it continues is higher. I only fade when I see clear exhaustion signs and I reduce size.

I don't have a precise distance rule. I look at past examples on the chart and see what looked far. Something like a multiple of the recent average candle range, as a rough guide. If price is stretched that much, I need more confirmation before taking a counter trade.

The line is also useful as a target for mean reversion. When price is stretched and starts coming back, the 200 EMA is where it might be heading, though I don't expect it to get there every time.

[Fairman]

I use something similar, but I measure the distance in ATR rather than by eye. When price is more than about two ATR from the 200 EMA on M15, I treat it as stretched and I do not fade without a clear structure break on the lower timeframe. It is not exact, but it gives me a consistent number instead of a feeling. I tested a few values on past charts and the exact number mattered less than having a rule at all. The main point is stopping myself from fading strong trends.

[Fairman]

Good point about using it as a target. When I do take a mean reversion trade from a stretched position, I do not expect price to go all the way back to the EMA in one go. I take partial profit at the first level and leave the rest with the EMA as the far target. The line moves, of course, so the target drifts toward price as time passes. It works better on quiet days than on trend days, where price can stay stretched for hours.