The EMA is one of the oldest technical indicators available. A lot of traders around the globe use this indicator in their daily trading activities. EMA is also referred to as exponential moving average. The EMA reacts to the most recent price changes than the simple moving average. This indicator places a higher weight and significance in the most recent data points. When you apply the SMA and MA on the charts, you won’t be able to differentiate between the two indicators. However, there are critical differences in terms of how both of the indicators are calculated. EMA is more sensitive to the price movement, and it can be compared to a double-edged sword. It helps traders in identifying the trend changes a lot earlier than the SMA. On the flip side, the EMA experiences more short term changes than the SMA. When the indicator goes below the price, consider that as a buy signal, and when it goes above the price, consider that as a sell signal. EMA also indicates support and resistance levels. The rising EMA tends to support the price, and the falling EMA tends to provide resistance to the price. EMAs are often used in conjunction with the other indicators to make sure the signals are genuine.
Choosing The Right EMA Period
There is no hidden EMA period setting that will generate 100% profitable trades in the market. Traders use the EMA period according to their trading style. For intraday traders, shorter EMA periods are quite beneficial to trade. While more extended period EMA is used by the swing traders.
For Intraday trading, Popular EMA Period are EMA5, EMA9, EMA15 & EMA21.
For Swing trading, they are EMA50, EMA100, EMA150, EMA200.
Below is the example of a forex chart where the EMA indicator is applied
EMA uses the previous values of the moving averages in its calculation. That means the EMA includes the entire price data within its current value. The oldest price data has a minimal impact on moving average, whereas the newest price data has the maximum.
EMA = (K x (C-P)) + P
C = Current Price
P = Previous periods EMA
K = Exponential smoothing constant
The smoothing constant K applies appropriate weight to the most recent price. It uses the ‘number of periods’ specified in the moving average.
Installing ‘EMA Indicator’ in MT4 (step – by – step process)
The EMA indicator comes within the MT4 indicator package, as it is one of the core tools bundled with the platform.
Open the MT4 Terminal, Click on the Insert > Indicators > Trend > Moving Averages.
When you click on the Moving Averages, a box will pop up, and under the MA method, choose the Exponential and click ‘OK.’
In the below chart we have plotted the EMA indicator on a USD/JPY Forex pair.
EMA Trading Strategies
EMA Crossover Strategy
This is a basic EMA strategy which is used by most of the traders across the globe. We use the 9 and 21 periods EMA to generate buy and sell signals. The basic idea is to see when the EMA goes below the price, and the lower period EMA crosses the higher period EMA. If you are able to see this setup on the chart, you can consider that as a buy signal.
In the below chart, as the 9-period yellow line, EMA crosses the orange line 21 periods EMA. This can be considered as a buy signal. This is one of the most popular strategies traders use. Remember to always set the stop loss below the recent low and take profit at a recent high.
In the below chart, the 9 period EMA cuts the 21 periods EMA from above, and it can be considered as a sell signal. If you are an intraday trader, use the 9 and 21 periods EMA as it works seamlessly in the market. However, we suggest you to use this strategy on a Demo account in the beginning before applying it to the live market. This is because when you can gain some experience on the Demo account, it gets easier to use the EMA crossovers in the live market. We also suggest you not to use this strategy in the ranging market. Because in the ranging market there are high chances that this indicator provided false signals.
Triple EMA Strategy
If you are more of a confirmation trader, you would love this strategy. Because as a confirmation trader, you always look for the 100% accurate signals to place a trade.
In this Triple EMA, we are going to use the 5,15,200 EMA to generate genuine trading signals.
The idea is to see if the 200 EMA is below the price and trend of the currency is upward. If yes, then only look for placing buy orders. But if the 200 EMA is below the price, wait for the 5 periods EMA to cross the 15 periods EMA to place your buy orders.
As you can see in the AUD/USD 15 min chart above, the pink line is 200 EMA, the yellow line is 5 period EMA, and the orange line is 15 period EMA. The market is in the uptrend, and 200 EMA is below the price action. Now, as the 5 periods EMA crosses the 15 periods EMA, it is a genuine buy signal.
In the below CAD/CHF 15 min chart, the market is in the downward trend. As the 200 EMA goes above the price, the 5 periods EMA crosses the 15 periods EMA. It can be considered as a genuine sell signal.
The triple EMA strategy is so amazing that even major institutions like banks, hedge funds and a lot of professional traders consider using this. Because the 200 EMA is a golden line as it signals the higher timeframes trend reversal way ahead of time.
Do not forget to see the position of the 200 EMA line as that is the crux of this entire strategy.
If it is above the price, then only look for the sell signals.
If it is below the price, then only look for the buy signals.
The EMA is quite popular and a handy indicator for the new and experienced traders as well. EMA is more sensitive to the price movements.
There is no secret period setting that generates an immense amount of cash flow from the market. In the end, it is the trader’s skill, mindset, and money management that will help them to make money.
By now, we believe you got the gist of Exponential Moving Averages. Let us know how this indicator and its respective strategies have worked for you in the comments below. Happy Trading!