How To Trade EMA Clouds [Beginner's 5-min Guide]

What is an ema cloud?

EMA (exponential moving average) clouds are a technical analysis tool used to identify a possible trend direction or reversal. They are formed by plotting two exponential moving averages, one short-term (fast) and one long-term (slow), and then filling the area in between the two moving averages.

This can be seen in the example below, where the top of the cloud is created from the fast ema, in the bottom of the cloud is made from the slow ema. The ema cloud area is found by the color fill between the slow and fast EMAs, as the chart below shows. This fill area allows an entry at possible support or resistance and presents a fluid trendline.

Adding EMA cloud system to your technical analysis

Currently, you won't be able to find this indicator easily through google. The quickest way to add the EMA cloud is tradingview.com, under the name “Ripster EMA Clouds.” Other platforms could add this indicator with one script, but this is the most popular trading system and most common (more importantly, free to use). Although we cannot know how long this will last, enjoy it while you have it.

If you were to add the clouds to your screen right now, you would see five clouds. This can be seen in the chart below. The most popular cloud will be cloud number two, and the second most popular cloud will be cloud number three. Of course, you’re welcome to experiment with the other clouds, but from my experience cloud, two and cloud three have fewer false signals, a fluid trendline for day traders, and better cross confirmation.

If you are interested in removing certain clouds, please double-click the clouds or tap the gear icon on the top left next to the indicator. Pulling this up, you can see the details on the inputs. You are welcome to customize any inputs for your two desired emas.

By seeing the settings, you can see EMA cloud 2 is created using the 5 EMA short length and 13 EMA long length, and the EMA cloud 3 is created using the 34 EMA short length and 50 EMA long length. These settings visually show just how simple this indicator is and how it is possible to recreate the source code if needed for other trading platforms.

How to Add Ripster Ema Clouds to Thinkorswim

There are not many platforms that support EMA clouds for charting and trading.  Luckily, a study for the Ripster EMA cloud was released and can be added to Thinkorswim as well.   In order to add this popular trading study, all you have to do is follow the instructions below.

1. Install Thinkorswim
2. Head to here to download the study 
3. Make sure your Thinkorswim platform is not running when you click "view in Thinkorswim"
4. Open Thinkorswim
5. Right-click your chart 
6. Click "edit studies"
7. Search for "Shared_ema_cloud_1"
8. Add indicator to the price section

Once added you should see the EMA cloud on your chart like the example below.  Just like Tradingview the settings for the indicator can be changed and colors adjusted to your liking.  The trading concept still applies even on a different platform.  A green ema cloud is bullish while a red ema cloud is bearish.  Most momentum traders will play the trend based on the cloud color.

.

EMA cloud crosses

When the two EMAs cross, this will change the cloud color fill and indicate a change in momentum. This concept implies that it could be an excellent time to play a reversal or take profit as a trader. A chart example below had a cloud crosses from green fill to red fill, signaling the end of the bullish run and the beginning of a possible bearish trend.

Why do they matter for trading?

EMA clouds can be utilized effectively to identify stock entry and exit points. It is common to use these clouds to gauge the market trend currently. As well as entering in the direction during support and resistance touches on the cloud.

You can see a chart example below. Again, dozens of touches lead to continuation. The ema cloud area serves as resistance levels to watch for a better risk to reward. This can be helpful when trying to play momentum with a bearish bias on any timeframe.

They are also used to measure the strength of a trend. For example, when the short-term average is above the long-term average, it is a sign of an uptrend. Conversely, it is a downtrend when the short-term average is below the long-term average, which the cloud color can also indicate. Green clouds are bullish and red clouds are bearish.

How to use ema clouds to trade better?

There are many different ways to use an ema cloud system to execute better in the markets. One popular strategy is to buy when the short-term average crosses above the long-term average and sell when it crosses below. This is known as a "buy and hold" strategy. This works the best on higher time frame charts for swing trading.

Buy and hold strategy

This can be seen in the example below, when the bullish signal appeared during the red to a green cross and when the sell signal appeared during the green to the red cross. This is one of the more straightforward swing trading strategies available. Like all indicators, they can easily be used in shorter time frames for day trading.

Unfortunately, all indicators are not as accurate on smaller time frames and produce more false signals. Like all strategies, stop losses need to be applied as nothing works 100%.

Short and hold strategy

Conversely, when the short-term average falls below the long-term average, it can be an entry point into a possible downtrend. When this occurs at one of the higher highs on the chart, it signals that there could be more room for price action to continue falling lower. This is also referred to as "selling into strength.” But this could also be an opportunity to play the bearish momentum.

You can see a chart example below when the green cloud crosses to red this is the first sell signal for long positions and possible short entry point for bearish positions. Conversely, when the red shadow crosses green, this is an opportunity to exit short positions and develop a potential long position.

These clouds allow us to take advantage of an entire movie from the high to the low. The move typically comes to an end on most of the cloud crosses.

Next steps

Now that you know how it is possible to use an ema cloud system to execute better, it's time to put what you've learned into practice! Remember, EMA clouds provide excellent support and resistance levels for traders to enter for a trend on any timeframe. Likewise, these clouds can provide excellent pullback levels for traders to watch. Like all indicators, there are various combinations of ways to use any indicator or strategy, but it is essential to find out what works best for your system. The only way to protect our accounts is not to forget stop-loss orders when trading so that you don't lose any more money than you have to. And most importantly, be patient and let the market come to you.

Trade with us!

If you're looking for a more sophisticated and educational options trading experience, look no further than "Market Moves Premium Options Trading Group." Our exclusive 7-day membership offers swing trading set-ups, fast text signals, and +100 hours of educational content. Plus, you'll have access to live trading sessions twice per day. So if you're ready to take your options trading to the next level, join us today!

Financial Disclaimer: Market Moves LLC is a company that provides education in financial and stock market literacy. WE ARE NOT FINANCIAL ADVISORS. In fact, it is illegal for us to provide any financial advice to you. Under U.S. law, the only persons who can give you financial advice are those who are licensed financial advisors through the SEC.  Results shown from Market Moves LLC or customers who use our product and/or service are individual experiences, reflecting real-life experiences.  These are individual results, and results do vary. Market Moves LLC does not claim that they are typical results that consumers will generally achieve. Past performance does not guarantee future results. You should not rely on any past performance as a guarantee of future investment performance