Exponential moving average forex strategy

  • Exponential moving average forex strategy

    EMA or Exponential Moving Average is a trading indicator used by traders to analyze prices on financial markets.

    Exponential Moving Average or better known by the abbreviation EMA is one type of moving average that gives more weight to the latest data points.

    EMA responds more quickly and significantly to current price changes. The opposite of a simple moving average which applies the same weight to all observations in the period.

    Exponential moving average explained

    Basically the Exponential Moving Average indicator is a modification of the Simple Moving Average method.

    Giving weight to the EMA provides a faster response than SMA which is considered less able to represent price rate movements, especially when there is a change in direction trend..

    SMA provides a slow response in providing reference signals that are used to predict the next price movement.

    EMA tries to improve from that condition, thereby reducing the weakness of SMA.

    Thus, EMA is expected to provide a better indication of price movements and trend changes.

    EMA uses the same working principles as SMA. So how to read it in use on the graph is the same, but the EMA formula gives weight to the observed exchange rate data.

    In the calculation formula, the EMA value shows the moving average value of the given rate according to the period, but the last exchange rate is given a weight greater than the previous value.

    Weighting the EMA is the same as the weighting in the WMA, which involves periods.

    The difference is that if the WMA is the larger the period used, the greater the weight of the last value. While at EMA the greater the period we use, the smaller the weighting of the last value used.

    Exponential moving average formula

    The formula for calculating the EMA involves only using a multiplier and starting with SMA..

    If you are curious about how to calculate the EMA, you need to do three steps:

    • Calculate SMA

    • Calculate the multiplier for a weighted EMA

    • Calculate the current EMA

    The first step is to calculate SMA.

    It's easy enough because SMA is simply the sum of the stock's closing price for that number of time periods, divided by the same number.

    Say the 10-day SMA is simply the sum of the closing prices for the last 10 days, divided by 10.

    The formula looks like this:

    The formula for the multiplier for calculating a weighted multiplier looks like this:

    In this example we use SMA 10, so to calculate the EMA is as follows.

    The weight given to the most recent prices is greater in the short period EMA when compared to the longer period EMA.

    For example, an 18.18% multiplier is applied to the most recent price data for the 10-day EMA, while for the 20-day EMA, only a weighting of the multiplier of 9.52% is used.

    Besides that, there are also variations in the EMA using the opening, highest, lowest, or median prices.

    Here formula to calculate EMA in another way

    Current price = closing rate 

    Previous EMA = previous EMA.

    Exponential Moving Average forex strategy

    Moving Average in forex can refine and simplify it for traders to get the opportunity to enter or exit the market in a timely manner.

    SMA often causes delay signals, so many traders prefer to prioritize using EMA in currency trading.

    EMA does react better to prices but this could be a problem for the EMA. Because EMA can provide multiple signals, for example reacting repeatedly to one price change.

    The first time - when a new signal is received, the second - when the values ​​are removed from the average calculation.

    It happens because this Indicator changes when a new price value appears.

    Unlike the SMA, the EMA can only react once to changes in price, when the price is received.

    Based on this fact, exponential averages are considered more desirable to be used in the Forex trading process.

    The reason is that type MA is more concerned with new data than old information.

    The EMA can react to recent price changes more quickly without relying too heavily on old changes.

    Where in it, the EMA will be able to produce a higher quality price smoothing chart.

    With that advantage many traders use the exponential average, as the most reliable indicator today, compared to other similar indicators.

    This indicator shortens the delay based on the fact that the biggest change is given by the latest prices.

    It should also be considered that the weight given to the final price depends entirely on the length of the EMA period.

    The `EMA is determined by adding a portion of the actual closing price to the last value.

    As a result, in the shorter EMA period, more weight is given to the last price. This will give a curve of the opportunity to display it on the price chart, almost the same as the actual price change in the currency pair.

    Thus EMA allows providing relatively better quality than simple moving average.

    The downside of EMA, however, is that due to its quick reaction, this indicator tends to give the false signal.

    On the actual chart, the difference between EMA and SMA is not taken into account but can be seen clearly.

    Many experienced traders say that the EMA reflects market price conditions which make more sense because the previous price affects an exponential decline when the price process moves from the current price.

    Interpreting EMA

    Like all moving average indicators, they are far more suitable for market trends.

    When the market is in a strong and sustained uptrend, the EMA indicator line will also show an uptrend and vice versa if the trend decreases, the EMA indicator also shows a downward trend

    Alert traders not only pay attention to the direction of the EMA line but also the relationship of the level of change from one candle to another.

    For example, when a strong uptrend price action starts to flatten and turn around, the rate of change in EMA from one candle to the next candle will begin to decrease until the indicator line is level and the rate of change is zero.

    Because of the lagging effect at this point, or even some of the previous bars, the price action should have been reversed.

    Therefore, observing that a consistent decline in the level of change in EMA itself can be used as an indicator which can further counter the dilemma caused by the lagging effect of the moving average.

    How to Use of EMA

    EMA is usually used by traders with a combination of other indicators to confirm significant market movements and to measure their validity.

    For traders who trade intraday and fast-moving markets, EMA is more applicable.

    Quite often, traders use EMA to determine trade bias.

    For example, if the EMA on the daily chart shows a strong upward trend, intraday trader strategies may only trade from the long side on the intraday chart.

    Basic Differences between SMA and EMA

    The basic difference between SMA and EMA indicators can be seen from its usefulness. If you want to use the Moving Average indicator on the stock market that is moving quickly, EMA is the best choice.

    The reason is that the EMA is faster at capturing changes in a trend so that traders can execute orders resulting in even greater profit.

    However, you must be careful with false signals that occur because indicators that are too responsive will generate more trading signals.

    One fact is that the EMA is very fast in responding to every share price, so you think there will be a change in trend that is formed, when in fact it is just a temporary spike in price.

    While SMA, its having function is the opposite of EMA. SMA is preferable for traders who prefer more subtle signals in response to price changes.

    This is because SMA work better when looking at a longer time frame and will give an overview of the order of the overall trend. Although it is slow to respond to price action, this can protect you from false signals. 

    The disadvantage SMA that you may be too late so you will lose momentum to enter at the best price.

    Simple Moving Average or SMA is the simplest Moving Average indicator, according to its name, which is simple. However, SMA indicator is reliable because it sounds simple but if with the right use, SMA can guide you to recognize price movements.

    For example, if you use 50 SMA on the 1-hour chart, the 50 SMA you can see is the sum of the last 50 closing prices. Then, the sum is divided into 50, so that from that calculation you can get the average value of the closing price in the last 50 hours.

    What to Choose SMA or EMA?

    So it can be concluded, EMA is different from the Simple Moving Average. EMA is only able to react once to price changes, especially when the price is received. Based on this fact, EMA is considered more desirable for use in the forex trading process.

    Another reason is that indicators tend to prioritize new data rather than long information so that EMA is able to react to the latest price changes more flexibly and does not always depend on old changes, which this indicator will be able to produce finer and better price charts.

    EMA is highly recommended by professional traders as the most reliable indicator now, when compared to other similar indicators. EMA can shorten the delay based on facts in the biggest changes given by the final prices. You should also consider that the weight given at the last price depends entirely on the length of the EMA time.

    If you are an aggressive trader so you want to use MA indicators that are able to react faster to price movements, then you must choose EMA because this indicator is the right choice.EMA can help you capture opportunities that are more agile than SMA.

    Thus, the profits or profits that you can produce will certainly be even greater, but the disadvantage is that you can be trapped by fake signals given by EMA. Therefore, we recommend careful and careful analysis of prices.

    Well, if you are a more passive person in trading, then SMAl is the best choice for you. SMA reacts more slowly in price movements than EMA. That way, the opportunities given will also appear longer. This means that the profit generated will be smaller, but the possibility of being trapped by false signals is also smaller.

    How to Trading With EMA 9 and EMA 18

    This is a floor trader strategy for day trading with a time frame of 1 hour or 4 hours. Basically this way of following the trend by following a few rules with the concept:

    • In trending, correction or retracement will always be repeated.

    • Use EMA indicators to identify trend direction, and entry based on trend direction. The EMA indicator setting period used is 9 and 18.

    • Using observations of candlestick reversal formations as signals for entry after a retracement or correction occurs. Reversal candle formations such as bullish or bearish engulfing, or doji.

    How to determine sell entry

    • Wait for the ema 9 indicator curve to crossing ema 18 from top to bottom, which is a signal for a downtrend.

    • Wait for a retracement or correction to occur, which is when the price moves up and touches the ema 9 indicator curve or the indicator both curve.

    • Look for reversal candle formation and sell entry when the price reverses (pulls back) and breaks the previous lowest level of the bar.

    • The stop loss level is set between 1 and 5 pips above the highest level of the bar during the retracement.

    How to determine the buy entry

    • Wait for the ema 9 indicator curve to crossing ema 18 from the bottom to up, which is a signal for an uptrend.

    • Wait for a retracement or correction to occur, which is when the price moves down and touches the ema 9 indicator curve or the indicator both curve.

    •  Observe the reversal candle formation, and entry buys when the price reverses (pull back) and breaks the previous highest level of the bar.

    • The stop loss level is set between 1 and 5 pips below the lowest level of the bar during the retracement.

    How to determine exit point

    In this method exit can be determined in various ways, among others, by moving the stop-loss level to the break-even level, using trailing stop, setting the risk/reward ratio of 1: 2 or 1: 3, using the Fibonacci retracement level or expansion, or specified on the closest important support or resistance level.

    Conclusion

    EMA is a type of moving average indicator that gives weight to produce a more responsive signal.

    The advantage is that it provides a faster signal than SMA.

    But here the weakness is that the false signal is generated, therefore traders are better off trading using other indicators as a compliment.

    By adding other tools such as MACD or RSI it can be a brake to avoid over-trading.