How To Trade Using EMAs
Exponential Moving Average (EMA) is moving average, which is calculated by adding to the previous value of the moving average a certain share of current closing price. When we are using an exponential moving average, last closing price is more weighted.
One of the most common ways of moving average using as technical indicators is determining if there is a trend in the market. For this purpose traders simply applies a moving average on the price chart. A bullish signal is generated when the price chart crosses the MA from the bottom to up and continues to be above the moving average.
A bearish signal is generated when the price crosses the MA on the chart from top to bottom and continues to be below the moving average. In the chart below, the ellipse is allocated for clarity the point of moving average price intersection from top to bottom and beginning of the relevant bearish trend.
The direction of the moving average conveys important information about the price. The upward EMA indicates that prices are rising. The downward moving average indicates that prices are falling. The increase of the long-period (100 days) moving average indicates a long-term upward (bullish) trend. And vice versa – the fall of the long-period moving average indicates a long-term downtrend (bearish) trend. The angle to the horizon of EMA reflects the strength of the trend – as the angle is greater, so the trend is stronger.
Below is hourly chart of USDJPY currency pair. During an uptrend, the price is above both exponential moving averages, and shorter 10 EMA is higher than the 20 EMA.
This is a good example of how you can use moving averages to find out when the trend is moving in the currency pair chart (bullish or bearish). From the foregoing the simplest trading rule using moving averages as technical indicators Forex is following: buy when the price, which is below the EMA line, crosses it from the bottom to up and sell when the price, which is above the moving average line, intersects it from the top to down.
Moving average period depends on the objectives pursued by the trader. Short EMA (5-20) are best suited for short-term trading. Interested in medium-term trends traders are using longer moving averages (20-60). Long-term investors prefer to use moving averages with 100 or more period.
Some periods used in the MA are more popular than others. For example, 200-day moving average is probably the most popular. Its length is a clear indication of the fact that this is a long-term moving average. Next in popularity is the 50-day moving average – it is often used for medium-term trends. Many traders prefer to use 50-day and 200-day moving averages together in their trading systems.
As the period of EMA is longer, so more accurate signals it shows when crosses the intersection with the price and the probability of false signals in flat trading is lower. Long moving average is very much delayed, so then trader’s task is to weed out false signals (which appear when there is no trend and in the presence of a changing (volatile) market in which price chart shows false breakouts).