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We know that the Exponential Moving Average (EMA) is a line created by calculating the average of a determined figure of period points and averaging them.
Added weight is given to the first few points, unlike the simple moving average. In the SMA, identical weight is given on all data period points. What is the reasoning behind this? It was found that many traders wanted a moving average that reacted earlier to sudden changes in price.
Thus, the birth of the exponential moving average indicator. This is seen simply by overlaying both the SMA and the EMA on the same charts. But there is a harmful side to this behavior. Because it responds quickly, many incorrect changes in the trend occur.
In a ranging market, this can be very deadly. As such, all moving averages are commonly not used when the markets are side trending owing to the number of misleading indications given during this period.
One of the more recognizable strategies involving two EMA’s is the EMA crossover. In general, traders use the 13 along with 5 EMA in this strategy. The 5 EMA is the lead line, traders buy or sell if it goes on top of or under the 13 line. When the markets are in a solid trend, this strategy does fairly well. If used when the markets are side trending, prepare to lose money.
An additional exponential moving average cross over technique involves not two EMA’s but three EMA’s. Forex traders go for the EMA of 4, 9 and 18. When utilized, the three periods depict the short term, mid term and long term trends.
Should both the 4 and 9 exponential moving average cross higher than the 18 line, this is a sign to buy. In reverse, should both 4 and 9 cross underneath 18, that is an indication to sell the financial instrument.
Despite the fact that this indicator is efficient, to boost the percentage of good signals, always employ with other kinds of tools. It is ultimately used to confirm decisions and trades..
If you require a complete tutorial on exponential moving average and a wide selection of popular forex indicators can be found on the authors forex trading website.
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