Exponential Moving Average - Using The EMA Forex Indicator

The Exponential Moving Average Indicator is a immensely popular tool used by technical traders from all financial markets. It is the result of taking a series of data based on a determined period (Keyed in by the trader) and averaging the result. Which makes is sound a lot like other moving averages. But there's a difference.

The difference between the simple moving average and the EMA is the fact that fresh points are given additional weight in the exponential moving average. Equal weight on period points are given in the SMA indicator.

You might be asking youself, why? This indicator was created as a moving average that responds well to market changes. To amend this problem, the exponential moving average was created. In comparison with the SMA indicator, the EMA always responds earlier to changes in price.

But it does not always do well. Because it responds quickly, many false changes in the trend occur. In a ranging market, this can be very lethal. As such, all moving averages are usually not used when the markets are side trending due to the number of wrong indications given during this period.

The EMA crossover is a popular strategy involving this indicator. An EMA of 5 in addition to 13 is utilized on the charts. Any cross from the 5 ema above or under the 13 ema indicates a buy or sell signal. When the markets are in a solid trend, this strategy does quite well. In a ranging market, heavy losses will occur.

An extra exponential moving average cross over technique involves not two EMA's but three EMA's.

Forex traders select the EMA of 4, 9 and 18. All three periods depict the short term, long term and mid term trends of a financial instrument.

A signal to buy would crop up when both 4 and 9 exponential moving averages cross on top of the 18 EMA. In reverse, should both 4 and 9 cross beneath 18, that is an indication to sell the financial instrument.