What is the EMA Forex Strategy?

    By
    Freeman Conn
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    Exponential moving averages are among the earliest forms of technical analysis. Millions of traders use them in their trading strategies. This guide will show you how to implement a simple exponential moving average method. 

    Change your trading for the better and become a successful, long-term trader by learning what you need to know! Moving averages can be helpful indicators. 

    What is EMA?

    Forex traders commonly use exponential moving averages (EMAs). By analyzing where the price action sits on the EMA, traders determine when to enter or exit a trade. A trader may consider a short sale or a sale at a high price and a purchase at a low price.

    If the short-term EMA crosses above the long-term EMA, then a trader would enter a buy order; if the short-term EMA crosses below the long-term EMA, a trader will enter a sell order. EMAs, such as a 20 or 10 EMA, represent the preceding period a trader has chosen. 

    An EMA is typically expressed as several days, so a 20 EMA corresponds to 20 days ago, a 50 EMA to 50 days ago, and so on.

    Using EMA crossovers as a Buy/Sell indicator 

    Trading signals may be based on crossovers between the 50 EMA and the 10 and 20 EMAs. One forex trader’s strategy involves observing a single EMA price as a guide when making trading decisions. 

    Traders remain on the buy-side as long as the selected EMA is above the price level chosen; traders who fall below the EMA become sellers unless the price crosses above the EMA.

    Forex traders typically use EMAs in the following amounts: 5, 10, 12, 20, 26, 50, 100, and 200. The 5- and 10-day EMAs are more likely to be used by traders who use shorter-term charts like the 5- and 15-minute charts. 

    Higher EMAs, such as the 20 and 50, tend to be favored by traders looking at higher timeframes. A longer-term trend trader should pay attention to the 50, 100, and 200 EMAs.

    Trading with the EMA is so common because, although past performance does not guarantee future outcomes, traders can determine whether specific points in time-regardless of their time frame-are, are outliers when compared to the average.

    How to use the EMA indicator in forex trading

    EMA indicators have the advantage of being visually simple. With the EMA, traders can quickly determine the direction of price behavior. Since the EMA is a lagging indicator, volatility in the market may not be adjusted promptly. Recent prices are given greater weight in the EMA indicator than current prices with similar settings.

    In 15-minute charts such as the above “GBP/USD” chart, EMAs work best when a long-term trend is present. In the case of EMA “Red,” it follows the upward trend, lagging below and forming an angled support line until the trend is reversed. Prices fell very quickly in the latter portion of the chart, emphasizing this indicator’s “lagging” behavior.

    Bottom line 

    EMA charts are never 100% accurate, just as with any technical indicator. Using an EMA in a sideways or ranging trend will produce false signals, especially if the setting is short. While false signals can occur, the positive ones are consistently strong enough to give forex traders an edge. 

    It takes time to develop the ability to interpret and comprehend EMA alerts. When confirming potential trend changes, another indicator in addition to the EMA tool is always recommended.