One of the oldest forms of technical analysis is the EMA (Exponential Moving Average). Most forex traders have used this indicator more types than they can count. To become a long-term forex trader, learning how to leverage the EMA trading strategy is the key to success.
Moving Averages are effective indicators, and EMA is an effective type of MA indicator used to trade in the forex market. Traders use the EMA strategy to identify predominant trends in the forex market because it provides support and resistance levels that help you effectively execute your trade.
The EMA strategy is a universal trading strategy that works for forex and stocks, currencies, indices, and cryptocurrencies. EMA tends to work for any time frame, which means you can use it on any preferred chart.
How to leverage the EMA formula when trading
On a price chart, the EMA is a line that uses a mathematical formula to smoothen the price action. The line shows the price average over a specific period of time. It tends to put more weight on the current price, making it more reliable since it reacts fast to any changes in the price data.
The EMA works to help reduce noise and confusion associated with everyday price action. It also smooths the price action to reveal the trend. Sometimes, it will reveal patterns you can’t see, making it more accurate and reliable in forecasting future changes in the forex market price.
To calculate the Simple Moving Average, we take the sum of the periods and then divide it by 20. To focus on the recent price, a multiplier is required because the MA formula is what brings the values together.
With EMA, the rule is that you are in an uptrend whenever the price trades above the MA, and as long as you remain above it, you should expect higher prices. This is also the case when you are trading below the EMA, you are in a downtrend, and as long as you are below it, you should expect lower prices.
The easiest way to capture the new trend is by using two EMAs as your entry filter. Using one MA within a more extended period and another within a shorter period will help automate your strategy, removing subjectivity from your trading process.
The EMA strategy tends to use the 20 & 50 periods, which is the most standard indicator on trading platforms. The aim is to wait for the price to trade above the 20 and 50 EMA. When the EMA crosses over, it adds weight to a bullish case. This happens when the 50-EMA crosses above because it creates an automatic buy or sells signal.
However, we recommend adding a new confluence to support your view to avoid a false breakout. Hence, it would be best to wait for the zone between 20 & 50 EMA to be tested a few times before you can look for buying opportunities. Here, more patience is required!
At least two successful retests are enough to help you decide how to develop the trend. Always keep in mind that no price is either too high to buy or too low to sell in trading. When you retest the zone for the third time, you can buy at the forex market because you have enough evidence that the bullish momentum holds and will continue to push the market higher.
Here, we recommend placing a protective stop loss of 20 pips below the 50 average because you are sure the trend is up. The trend tends to remain intact when you trade above both EMAs. After which, your next plan should be an exit strategy based on the EMA.
We recommend taking profit once you break and close below the 50 average. This is because you shouldn’t use the same exit technique as your entry one. The EMA formula allows you to take your profits at a time when the market is almost reversing.
The EMA strategy in forex trading doesn’t necessarily help you predict the market but react to the current forex market condition, which is a wiser way to trade. This strategy will help you plot a much smother EMA to give you better entries and exits.