No one has ever thought of this moving average in history nor any article written about it. How does this EMA come about? I was doing a research to understand market behavior and limits of turning using moving average combining it with Newton’s 3rd law of motion that states that action and reaction are equal and opposite. If the law is true then we have to determine the center of action.
Everything in life has a life cycle of beginning and ending. This is applied to cyclic wave portrayed by Elliot wave analysis.
Without much ado, the 4000 EMA was derived from the concept of human psychology in trading using where 200 EMA is considered quite significant in determining the phase of phase either bullish or bearish state. We have on average of twenty trading days in a month. The product of these two event taking 200 EMA as standard human psychology and multiplied by his twenty day activities in a month with give you 4000EMA.
This EMA is basically used to Gauge market strength in Monthly time frame. I am still researching more about its usefulness in other time frames.
The role of the 4000 EMA is to divide the market structure into two zone. Bullish and Bearish zone. Market becomes bullish when price breaks above 4000 EMA and Bearish when price breaks below it. Any time market is at this point, we expect to see a reaction that will cause market deviation since it is acting as mean or center of the market. The decision the market participants takes at this level is important for the many months of the market phase until its life cycle is completed.
How do you gauge the strength of market participants in this mean pivot point?
1. We use an indicator called stochastic oscillator. The role of the stochastic is to tell us the momentum of the buyer or seller when they have taken control at the pivot point.
2. BUY Decision: A candle stick that breaks above 4000 EMA and have Stochastic above 80 is confirmation of buy signal.
3. SELL Decision: A candle stick that breaks below 4000 EMA and have Stochastic below 20 is confirmation of sell signal.
4. We take note of Newton’s 3rd law of motion that states that action and reaction are equal and opposite.
The EURUSD according to 4000 EMA is in bearish zone and one will be looking for opportunity to sell after retest of 4000 EMA in compliance to Newton’s 3rd law of motion.