EMA and SMA are the two types of moving averages used most in Forex. Today, Howtotradeblog will help you get acquainted with the EMA. We will guide you on how to use EMA indicator like professional Forex traders. This is an important skill you need to have when trading using moving averages. Stay tuned to learn more about this EMA.
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What is the EMA indicator? How it works and some popular EMAs
EMA stands for Exponential Moving Average which is understood as exponential average. Unlike the simple moving average (SMA), EMA indicator uses an exponential formula for calculation. So, EMA has better sensitivity and reacts to price faster than SMA. Professional traders often use EMA to predict price movements in the short to medium term.
Compared to SMA, EMA tracks price trends better. It catches up with fluctuations faster. However, for this reason, EMA also filters out noisy signals worse than the SMA.
How to use the EMA indicator in Forex
Like other moving averages, the basic signals that the EMA gives to traders are trend signals.
Specifically:
(1) When the price is in a downtrend, the Japanese candlesticks are below the EMA which is heading down.
(2) With a sideways market, the EMA and the candlesticks of the price are intertwined.
(3) When the price is in an uptrend, the Japanese candlesticks are above the EMA which is pointing up.
Some popular EMAs
There are three types of EMAs used by many traders to analyze the market:
+ EMA30: Analyzing short-term fluctuations of the price.
+ EMA100: Predicting mid-term volatility.
+ And EMA200: A long-term view of the market trend.
The example below shows that with the EMA 30, the price has gone sideways but with the EMA 200, the main trend of the market is still bullish.
How to effectively trade Forex using the EMA
As a trend indicator, EMA or any other moving average is also used mainly to predict the trend by certain lag compared to the price. However, there are a few strategies to trade Forex that you can refer to when using EMAs to search for a trade.
Notes: These are test transactions to get used to the EMA. You should not apply it to real accounts. Test on a Demo account by clicking the button below to keep your money safe.
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Strategy 1. Buy bottoms and sell tops in Forex with EMA30
This way of placing an order is quite risky. However, if the price goes according to the prediction, the profit will be very high for your transaction. The basis for opening orders is based on the signal of developing a new price trend with a strong enough candle to pierce through the EMA.
Open a BUY order with the EMA30 as follows:
+ Entry Point: When the price crosses the EMA30 from below with a bullish candle with a long body. Usually, after a Marubozu candlestick, you should open an order.
+ Stop-Loss: At the nearest Support before the price crosses the EMA30.
+ Take-Profit: when the price touches old resistance levels that have been formed in the past.
Open a SELL order with the EMA 30 as follows:
+ Entry Point: When the price crosses the EMA 30 from above with a red bearish candle with a long body. Usually, after a Marubozu candlestick, you should open an order.
+ Stop-Loss: At the nearest Resistance before the price crosses the EMA 30.
+ Take-Profit: when the price touches old support levels that have been formed in the past.
Strategy 2: Trade Forex following the trend with EMA indicator
With this trading strategy, your orders will be safer because only after the EMA confirms that the current trend is bullish or bearish can you act. Specifically, when the EMA signals an uptrend, you should open a BUY order. When the EMA signals a downtrend, you should open a SELL order.
Open a BUY order as follows:
+ Entry Point: The price is in an uptrend. Open an order when the price bounces back to touch the EMA and then bounces up again. Usually, there will be a reversal candlestick pair with a first red candle and a second green candle.
+ Stop-Loss: At the nearest support before the price touches the EMA and bounces back.
+ Take-Profit: when the price touches old resistance levels that have been formed in the past.
Open a SELL order as follows:
+ Entry Point: The price is in a downtrend. Open an order when the price bounces back to touch the EMA and then falls down again. Usually, there will be a reversal candlestick pair with a first green candle and a second red candle.
+ Stop-Loss: At the nearest resistance before the price touches the EMA and bounces back.
+ Take-Profit: when the price touches old support levels that have been formed in the past.
In short
Above is the article introducing you to the EMA in technical analysis. Please leave comments about the EMA if any. In the following articles, I will provide advanced Forex trading strategies around this EMA. Goodbye and wish you a successful transaction.
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The post What is EMA Indicator? How To Use The EMA Efficiently In Forex Trading appeared first on How To Trade Blog.
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