The main issue in using an ema crossing strategy is that they can often cross during sideways markets, sending many false alarms. They can also lag considerably when the market is in a euphoria stage (a rapid, consistent rise), which causes the fast signal to become very far from the slow one. To circumvent this issue we have designed an indicator that we called the Phase Angle. Instead of looking at the crossing point, the Phase Angle indicator computes the angle in degrees between the two directional vectors of the fast and slow ema. Here is a picture to help illustrate what we mean:
A very sharp downturn will create a huge negative phase angle and can tell us days before an ema crossing strategy that this is going to be a massive correction. Indeed, looking simply at the crossing point implies that our strategy is mostly dependent on how far apart these two lines are, which is not actually that relevant for understanding the market trends. In fact, this distance is responsible not only for the noise caused by the two lines constantly crossing during a sideways market , it’s also responsible for the lag in flagging the market shifts. By looking at the angle between the two lines instead, we are looking indirectly at the impulse momentum of the current move (up or down), information that is incredibly relevant for understanding if we should be in or out of the market.
The Phase Angle works incredibly well not just on stock indices but also for Bitcoin. In our overall hedging strategy, this method is responsible for quickly catching the tradable bounces during the bear phase of the market. In a regular market, it can also trigger the hedge signal if it peaks to a very outlying statistic.
The phase indicator will display by default the threshold used on the SPY for catching the bounces during a bear market. In the indicator parameters, you can also activate the right threshold to be applied on QQQ. You can also enable a mode in this menu where you can enter your own threshold in case you would like to use the Phase angle on other assets. In the style tab of the parameters menu, you can also enable two other signals which give a value related to the significance of a given peak or value depending on the recent market history. More technically, this will tell you how many standard deviations the phase angle is currently in relation to its recent average. This allows for a more dynamic view of whether some event in the market is important or not, as strategies that compare themselves to "all-time-highs" or "lows" or an "all-time-average" might miss or lag on small but still significant movements that can impact your wallet