In the figure below, you can see an actual SELL trade example, using our exponential moving average strategy. The possibility exists that you could lose more than your initial deposit. Because of the lagging effect, by this point, or even a few bars before, the price action should have already reversed. The EMA is very popular in forex trading , so much that it is often the basis of a trading strategy. Also, please give this strategy a 5 star if you enjoyed it! To avoid the false breakout we added a new confluence to support our view which brings us to the next step of the exponential moving average strategy.
Exponential Moving Average (EMA) vs. Simple Moving Average (SMA) Let’s take a look at the 4-hour chart of USD/JPY to highlight how a simple moving average (SMA) and exponential moving average (EMA) would look side by side on a chart. Notice how the red line (the 30 EMA) seems to be closer price than the blue line (the 30 SMA).
Exponential Moving Average (EMA) vs. Simple Moving Average (SMA)
Learn the formula for the moving average convergence divergence momentum indicator and find out how to calculate it and its In technical analysis, it is common to see a series of numbers following a given technical indicator, usually in brackets. Learn how the triple exponential moving average is calculated and the indications it provides that are most helpful to traders Learn some of the best momentum technical indicators that can be used along with the relative strength index to anticipate These technical indicators help traders visualize trends by smoothing out price movements, but they are based on different calculations.
Find out how this simple trading strategy can be added into your trading arsenal. The swing trading style, between day trading and trend trading, may be a good one for beginners to try. Learn about market wave, the second screen in this three-part system. Biotech funds have bounced sharply after testing downtrend lows, setting off a wave of bottom calls. These three broken stocks show exceptionally strong volume patterns that could support new uptrends. Health insurance carriers have dropped into holding patterns at their day EMAs, awaiting specifics on health care reform.
These lesser known oil services stocks have risen above their day EMAs and are currently basing at support. Before we go any further, we always recommend writing down the trading rules on a piece of paper. Our exponential moving average strategy is really just comprised of two elements or simply put it two exponential moving averages.
The first degree of sophistication to capture a new trend is to use two exponential moving averages as an entry filter. By using two exponential moving averages one with a longer period and one with a shorter period, we can automate the exponential moving average strategy and remove any form of subjectivity from our trading process.
The first step is to properly set up our charts with the right exponential moving averages so we could be able to identify the EMA crossover at the later stage. The exponential moving average strategy uses the 20 and 50 periods EMA. Most standard trading platform come with default moving average indicators so it should not be a problem to locate the EMA either on your MT4 platform or Tradingview.
The second rule of the exponential moving average strategy is the need for the price to trade above both 20 and 50 exponential moving averages and secondly, we need to wait for the EMA crossover which will add more weight to the bullish case.
However, since the market is prone to do a lot of false breakouts we at Trading Strategy Guides need more evidence than just a simple EMA crossover. To avoid the false breakout we added a new confluence to support our view which brings us to the next step of the exponential moving average strategy.
The conviction behind the exponential moving average strategy relies on multiple factors to confirm a new trading idea. After the EMA crossover happened, we again need to exercise a little bit more patience and wait for two successive and successful retests of the zone between the 20 and 50 exponential moving averages.
The two successful retest of the zone between 20 and 50 EMA gives the market enough time to actually develop a trend. We just wanted to cover the whole price spectrum between the two EMAs because the price often times will only briefly touch the shorter moving average EMA which is still a successful retest.
Now, we still need to define where exactly are we going to buy which, obviously brings us to the next step of the exponential moving average strategy. If the price successfully retests the zone between 20 and 50 EMA for the third time we go ahead and buy at the market price.
We now have enough evidence that the bullish momentum is strong to continue pushing this market higher. Now, we still need to define where to place our protective stop loss and where to take profits, which brings us to the next step of the exponential moving average strategy.
After the EMA crossover happened and after we had two successive retests we now know the trend is up and as long as we trade above both exponential moving averages the trend remains intact. In this regard, we place our protective stop loss 20 pips below the 50 EMA. The last part of our exponential moving average strategy is the exit strategy which is based again on the exponential moving average.
If we would be waiting for the EMA crossover to happen on the other side then probably we would have given back some of the potential profits because we still need to consider the fact that the exponential moving averages are still a lagging indicator.
The exponential moving average formula used to plot our EMAs allow us to still take profits right at the time the market is about to reverse. However, because the market goes down much faster, we sell on the 1st retest of the zone between 20 and 50 exponential moving averages after the EMA crossover happened. In the figure below, you can see an actual SELL trade example, using our exponential moving average strategy.
The exponential moving average strategy is a classic example of how you should construct a simple EMA crossover system. The advantage of our trading strategy stands in the exponential moving average formula which plots a much smoother EMA that give better entries and exits.
BREAKING DOWN 'Exponential Moving Average - EMA'
DEFINITION of 'Exponential Moving Average - EMA' An exponential moving average - EMA is a type of moving average that places a greater weight and significance on the most recent data points. The exponential moving average - EMA is also referred to as the exponentially weighted moving average. Aug 23, · Exponential Moving Average Formula and Exponential Moving Average Explained. The exponential moving average is a line on the price chart that uses a mathematical formula to smooth out the price action. It simply shows the average price over a certain period of time/5(4). The exponential moving average (EMA) differs from a simple moving average (SMA) in two primary ways: more weight is given to the most recent data and the EMA reacts faster to .