Exponential Moving Average - The EMA Forex Indicator
If you know your moving averages, you will know that the exponential moving average line is created averaging a number of period points in addition to averaging them.
The difference between the simple moving average is the fact that new points are given additional weight. In the SMA, equal weight is given on all data period points. What is the reason for adding weight? This indicator was created as a moving average that reacts well to market changes.
To amend this problem, the exponential moving average was produced. If you were to enter a 20 SMA alongside a 20 EMA, the exponential moving average will always respond to price movement sooner than the SMA would. But it does not always do well. Because it responds quickly, many wrong changes in the trend occur.
This is specially troubling in a side trending market. Because of this, most forex traders avoid using moving averages when the market is ranging.
One of the more popular strategies involving two EMA's is the EMA crossover. A period of 5 and 13 EMA is normally used. Should the 5 ema cross higher than the 13 line, buy, if it crosses beneath the 13 EMA, sell. When the markets are in a solid trend, this strategy does fairly well. Losses happen if this strategy is used when the market is side trending.
An additional exponential moving average cross over system involves not two EMA's but three EMA's. EMA of 18, 9 and 4 are utilized in this strategy. When utilized, the three periods depict the short term, mid term and long term trends.
A signal to buy would take place when both 4 and 9 exponential moving averages cross higher than the 18 EMA. In reverse, should both 4 and 9 cross under 18, that is an indication to sell the financial instrument.
Employ this indicator in conjunction with other general kinds to augment the chances of getting good signals from it. It is used to reinforce the trade and too much weight should not be given to it on its own.
Article Source: FxTradingStock.com
About the Author
Should you want a thorough guide on exponential moving average and a wide selection of popular forex indicators can be located on the authors forex trading website.
by: Prema Laga
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Word Count: 343
Date: Sat, 20 Feb 2010
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