Exponential Moving Average Or EMA Forex Indicator explained for you, EMA that is an abbreviated form of Exponential Moving Average is the Moving Average that is similar to the Simple Moving Average (SMA). Exponential Moving Average is used as an indicator to predict the future trend of prices. The reaction of EMA is faster to the latest price changes than a SMA. EMA is calculated by summing up the previous value to the MA of the specific share of the latest closing price. In the concept of EMA, latest prices of the currencies are given more value as compared to the older prices. EMA indicator is trend following and the formula used in the calculation of EMA is as below.
EMA = (Close (i) * P) + EMA (i-1) * (100-P)
Close (i) = Price of the recent period closure
EMA (i-1) = EMA of the previous closing period
P – Percentage of the price value used
Most popular short time period averages are of 12 days and 26 days and these are also used to create indicators like MACD and PPO. Most popular long term averages are of 50 days and 200 days. The only difference between the Exponential Moving Average and the Simple Moving Average is that the Exponential Moving Average has more weight to the recent data and less to the older data while Simple Moving Average has equal weight or identical weight to all the data or different price values of the SMA period. Therefore EMA is also termed as Exponential Weighted Moving Average. The purpose of adding extra weight is to get a moving average that reacts speedily enough to the drastic market movements.
How to use Exponential Moving Average or EMA lines
Open a chart for any currency pair. Click on the Insert menu, click on the Indicator, click on the Trend and then click on the Moving Average.
After clicking on the Moving Average , you will get a window of moving average. In that window you can set input period, Moving Average method, Apply to, style and color. In the Moving Average method field, select Exponential as shown in the picture below and your Exponential Moving Average line will be drawn on the chart.
EMA crossover is the strategy popular among the Forex traders. 5 EMA and 13 EMA are used typically in this strategy. This strategy should be adopted if market is going in a solid trend because heavy profit can be booked using this strategy in solid trend. This strategy should be avoided if the market is ranging because heavy losses may be seen if this strategy is used in the condition of ranging market. For example look in the figure below, red colored line is 13 EMA and blue colored line is 5 EMA and the trend is uptrend. So in this situation whatever you will purchase, the price will go high.
An additional strategy to benefit from EMA in the Forex uses three EMA and also utilizes the crossover theory. The three EMA selected by the Forex traders are 4, 9 and 18. These three periods represent the short term, the long term and the middle term trends of the Forex market. If 4 EMA and 9 EMA lines crossover the 18 EMA then the traders buy and if 4 EMA and 9 EMA lines cross below the 18 EMA then the traders sell because this is a sell indication in the Forex Market. For example, see in the figure below. From point A to B, 4 and 9 EMA lines have crossed and are above 18 EMA and from B to C, 4 and 9 EMA lines have crossed and are below 18 EMA.