Exponential Moving Average - The EMA Indicator Ireland
- Bollinger Bands
- Fibonacci Retracement
- MACD
- Moving Average
- Exponential Moving Average
- Simple Moving Average
- RSI (Relative Strength Index)
- Stochastic
In our Moving Average Forex indicator page, we know that the Exponential Moving Average (EMA) is a line created by calculating the average of a predetermined number of period points and averaging them.
However, unlike the simple moving average, added weight is given to recent data points. In the SMA, equal weight is given ot all data period points.
Why is this done? Some traders feel that simple moving averages do not react quickly enough drastic market movements.
To correct this problem, the exponential moving average was created.
If you were to enter a 20 SMA alongside a 20 EMA, the exponential moving average will always react to price movement faster than the SMA would.
There is a disadvantage to this. Because it reacts quickly, many false changes in the trend occur.
In a ranging market, this can be very deadly. As such, all moving averages are usually not used when the markets are side trending due to the number of false indications given during this period.
One of the more popular strategies involving two EMA's is the EMA crossover. An EMA of 5 and 13 is used on the charts. Any cross from the 5 ema above or under the 13 ema indicates a buy or sell signal. In a trending market, this strategy works pretty well. In a ranging market, heavy losses will occur.
Another exponential moving average cross over method involves not two EMA's but three EMA's.
EMA's of 4, 9 and 18 are used in this system. These three periods represent the short term, mid term and long term trends respectively.
A signal to buy would occur when both 4 and 9 exponential moving averages cross above the 18 EMA. In reverse, should both 4 and 9 cross below 18, that is an indication to sell the financial instrument.