The exponential moving average is a popular and commonly utilized forex trading tool. Many Traders use EMAs on their trading platforms to find exit and entry points of a trade deciding where the price action sits on the EMA. If it is high, the trader may look for a short sale or, conversely, and sale, and if it is low, it’s a buy.
TOP KEY TAKEAWAYS
- The EMA is a useful forex trading indicator when considering exit and entry points and is a popular trading tool.
- Using the EMA should combine with other trading tools, most commonly MACD, RSI, and others.
- Forex traders will often encounter support or resistance at long-term EMA crossovers and see a notable increase in volume.
The EMAs are different from a simple moving average (SMA) in two primary ways: more weight will be given to the recent data, and the EMAs respond faster to recent price movements than the SMA.
The EMAs are very popular in forex trading, so much that it is mostly the basis of a forex trading strategy. A normal forex trading strategy relies on selecting a longer-term EMA and a shorter-term EMA and trade based on the position of the longer-term EMA to the short-term EMA.
A trader would enter buy orders when the short-term EMA crosses over the long-term EMA or open a sell order when the short-term EMA crosses down the long-term EMA. When discussing EMA numbers such as a 20 EMA or 10 EMA, this number signifies the preceding time selected by the forex trader. Usually, the amount is in days, so a 50 EMA means the EMA is an average of the previous 50 days, a 20 EMA is the preceding 20, and so goes on.
Using EMA Crossovers as a Sell/Buy Indicator
When using strategy, a trader can be using crossovers of the 50 EMA by the 20 or 10 EMA as forex trading signals. Another simple strategy that forex traders use involves observing a single EMA price to make their trading decisions and entries. As long as the price remains over the EMA level, the trader keeps on the buy side; if the price falls down the level of the selected EMA, the trader is a seller unless the price crosses over to the upper side of the EMA.
The most common EMAs by forex traders are 5, 10, 12, 20, 26, 50, 100, and 200. Traders operating off shorter timeframe charts, like five- or 15-minute charts, will mostly use shorter-term EMAs, like the 5 and 10. forex Traders looking at higher timeframes will mostly use higher EMAs, such as the 50 and 20. The 50, 200, and 100 EMAs are considered especially significant for longer-term trend trading.
Using the exponential moving average is so common because although past performance does not guarantee future results, traders can determine if a specific point in time—regardless of their specified timeframe—is an outlier when compared against the average of the timeframe.