EMA, or exponential moving average, is a moving average (MA) technical indicator that follows the direction of a price trend. It is a ‘moving average’ indicator as the average price level is calculated by taking the sum of price points over a specific time period and dividing it by the total number of points i.e. averaging. Naturally, as time progresses, this moving average is re-calculated by using up the latest price data points. The MA reflects the price movements of an asset over the preceding time period and it is often used to identify the potential future direction of a price trend.
EMA is a weighted average indicator and is different from a simple moving average (SMA) in the way it is calculated: more weight is given to recent price points, while in a simple moving average all data points are assigned the same importance over a specific time period. Hence EMA is more sensitive to the more recent and relevant price action; it smoothes out the price trend by not including the ‘noisy’ and random fluctuations. There are many different ways in which this indicator can be used, and this article considers some of the common techniques that use EMA in trading.
EMA on Pocket Option
Often two exponential moving average indicators are used in conjunction to generate signals, one of a longer and one of a shorter period. Let’s look at an example of using these indicators on a candle chart. Choose the asset you’d like to trade, navigate yourself towards the indicator section of the chart and choose the “Moving Average” indicator:
Pocket Option sets a simple moving average as default so it is necessary to adjust the type of the indicator to EMA manually. To do so, either click on the small pen icon next to the Moving Average indicator on the top left corner of the screen or navigate yourself to the “Current” tab under the Indicators section, which contains all of the indicators you are currently using, and click the settings icon:
Once you are in the settings window, you can choose the type of the moving indicator, – EMA, and set the period, which is 14 in this example. Pocket Option also offers a weighted moving average (WMA) and a smoothed moving average (SMMA).
Under the “Styles” section you can choose the color and the width of the indicator line; click “Save” once all is set. You should now see an EMA indicator line on the chart.
Great, one of the EMA indicators is already set up. The second EMA indicator of a different period can be set up in exactly the same manner. It is a good idea to assign different colors to each of the lines; in this example, EMA 14 is red and EMA 28 is green. Pocket Option allows you to customize your trading indicators to your taste.
Having set up the two indicators, let’s look at how they can be used in trading. The main focus is on their intersection points as well as the distance between the two moving average indicators; the faster EMA is more responsive to price changes.
When EMA 14 indicator line crosses below the EMA28 indicator and continues downwards under it, with the gap increasing, this is an indication of a possible downtrend and a signal for a sell trade. This is often referred to as a bearish crossover and the price is below both of the indicators:
For a bullish crossover, EMA 14 crosses above the EMA 28 and continues upwards over it; this signals a possible uptrend for a buy position. The price of the asset is above both of the EMA indicators:
When the gap becomes more narrow, the trend is coming to an end.
There may be times when the markets are ranging and both of the indicators cross through prices; the signal’s clarity deteriorates greatly and it may be a good idea to refrain from trading. Remember that EMA cross-overs do not provide certainty but rather potential points for entry and exit; often traders use support and resistance or certain chart patterns to confirm these signals.
It is not always necessary to use a combination of two different Exponential Moving Average indicators; EMA 30 is also often used in trading on its own to identify a trend that is forming and an entry point.
On the image below we can see a developing uptrend and yet it is not clear where to open a buy position. Looking at EMA 30, it is possible to see a point where the indicator line cuts through the price point on the green bullish candle from above and continues on under the prices: this could be an entry point for a position.
A similar logic can be used for trading downtrends. During a downtrend it is possible to see a point where the indicator line cuts through a red bearish candle and continues on above the prices: this could be a point to open a sale position:
EMA indicators tend to provide more accurate signals when the period is set to 10 or higher and it is therefore quite suitable for longer time frame trading. Because more weight is placed on recent prices for its calculation, this indicator tends to be more susceptible to recent price trends. Remember, however, that EMA is backward-looking and does sometimes generate false signals; since it is not always possible to determine entry and exit points only this indicator or these points are delayed, it may be used together with other technical indicators.
As we have seen, the EMA indicator is great for identifying not only trend directions but also entry points for positions. Furthermore, points, where the indicator line cuts through the price, could be seen as signals of a trend reversal. Do not forget to practice using this indicator on your Pocket Option Demo account and best of luck!
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