EMA Indicator In Forex Trading

The EMA indicator can also be referred to as an exponentially weighted moving average and compared to Simple Moving Average (SMA), it reacts more to the latest price changes, while SMA places the same weight on both present and past prices. EMA is most commonly used to highlight latest price trends and find trend joining opportunities.

EMA indicator overview

EMA indicator in FX is a simple-to-use technical indicator that is designed to improve Simple Moving Average data by placing more weight on more recent price changes, as more recent data is more relevant than the older ones. It is represented on the chart as a single line that moves based on price changes.

• Indicator type: Lagging Indicator
• Best timeframe to use – 12-26 day EMA for short-term traders. 50-200 day EMA for long-term traders
• Goes best with: MACD
• Placed on: On top of the chart

Technical details of EMA indicator

As we mentioned, EMA is a type of moving average indicator that puts more attention toward recent price movements. This is a simple lagging indicator that can be used by both beginner and experienced traders. 12-day and 26-day EMAs are the most popular EMA periods for short-term traders. It is also easy to calculate and traders don’t need to know any additional information other than the price history of an asset.

Calculating EMA

Calculating EMA can be seen as a little difficult, especially for beginner traders. When calculating the Forex trading EMA indicator, we will need the following information: Price of the asset today, yesterday’s EMA, the number of days we want our EMA to include, and multiplier which most traders set as 2. Once we have all of this information on our hands, we can use the following formula for calculating EMA:

EMA = Price (T) x K + EMA(Y) x (1-K)

T = price today

Y = Yesterday’s EMA

K = 2 / (N +1)

N = Number of days in EMA

What does EMA tell us?

What makes the FX trading EMA indicator a really good technical indicator is that it provides us with various information. The most important information we get from the indicator is about trend directions. Some traders use EMA’s lines as support and resistance.

The information provided by EMA also depends on what period of EMAs we are using. Short-term traders usually use 12-day or 26-day EMAs. Long-term traders use 50-period or 200-period EMAs to identify long-term trends and price movements.

Practical application of EMA indicator

Forex EMA indicators can be found in every currency trading platform. On MetaTrader 5, if we go to the trend indicators section, we will see the Moving Average indicator, and there we simply select Exponential Moving Average, indicate the timeframe we want to use, and everything else is done by MetaTrader automatically. You don’t need to calculate anything manually.

The indicator is placed on the chart and there are multiple strategies that can be used with EMA. We will show you a few EMA indicator examples and explain how we can use them in Forex trading.

Crossover strategy

Being a trend trading indicator, the crossover strategy goes very well with the EMA indicator. Crossover strategy uses two different period EMAs simultaneously. One commonly used Crossover strategy is using 50-day EMA and either 10 or 20-day EMA. If the 20-day EMA crosses over and goes above the 50-day EMA it means that the uptrend might have started. But if this 20-day EMA crosses below the 50-day EMA, it signals that selling has intensified, and we might see a downtrend for some time.

Three Exponential Moving Average Strategy

Another popular trading strategy using EMA is the combination of three Exponential Moving Averages. It can also be classified as a crossover strategy, but things here are a bit more complicated. At first, we will need to take 5-day, 20-day, and 50-day EMAs and place them on the chart. Crossovers produce trading signals. For example, we should buy when 5-day EMA crosses above the 20-day EMA, while simultaneously the price of an asset, 5-day EMA, and 20-day EMA remain under the 50-day EMA. Stop Loss order can be placed just below the 20-day EMA. For determining the profit target, we simply need to monitor the trade. The target depends on the strengths of the trend.

Strengths and weaknesses of EMA indicator

FX trading EMA indicator is a highly popular technical indicator used by many traders. The indicator comes with advantages and disadvantages.

Strengths

• It is more accurate than SMA as it puts more weight on recent price movements
• On top of indicating trend movements, EMA also can be used as support and resistance levels
• It can be easily combined with other indicators such as MACD, ADX, and RSI
• EMA can also be used to find reversal points by looking at gaps between EMA and price

Weaknesses

• The indicator fails in choppy and ranging markets
• Being a lagging indicator, EMA can provide wrong and outdated signals
• Using EMA during volatile markets will most likely provide false signals

FAQs on EMA indicator

Is EMA indicator good for FX analysis?

EMA is a highly beneficial and widely used technical indicator. However, keep in mind that you should not only rely on the EMA as the indicator works in trends. Many traders use it in combination with other indicators such as MACD and RSI. EMA is a lagging indicator.

What are the risks of EMA indicator in Forex?

The risk of the EMA indicator in Forex is the wrong signals it can provide. It is a lagging indicator, and if we use it alone, especially in a volatile market, the probability of receiving incorrect signals is very high. EMA is a trend following indicator. Trend indicators do not perform well in ranging markets.

Can EMA indicator get you profits?

Most certainly. Despite having problems providing correct signals when used independently. EMA goes really well with other indicators and simple trendlines. Therefore, if we want to make profits with EMA, we should combine it with other FX indicators and strategies to increase the accuracy of the signals received.