We know that the exponential moving average line is created averaging a number of period points in addition to averaging them.
Extra weight is given to the first few points, unlike the simple moving average. Equal weight on period points are given in the SMA indicator. What is the rationale for adding weight? A quantity of traders feel that simple moving averages do not react quickly enough to drastic market movements.
To fix this problem, the exponential moving average was produced. In comparison with the SMA indicator, the EMA always responds earlier to changes in price. But it does not always do well. The quick reaction can give out many fake signals.
In a ranging market, this can be very deadly. As such, all moving averages are more often than not not used when the markets are side trending due to the number of fake indications given during this period.
The EMA crossover is a popular strategy involving this indicator. Generally, traders use the 13 as well as 5 EMA in this strategy. 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. If used when the markets are side trending, prepare to lose money.
An extra strategy involves three EMA and utilizes the cross over theory as well. Forex traders go for the EMA of 4, 9 as well as 18. When utilized, the three periods depict the short term, mid term and long term trends.
A signal to buy would crop up when both 4 and 9 exponential moving averages cross on top of the 18 EMA. Sell signals are obtained if both the 4 and 9 EMA cross below the 18 line.
While this indicator does have its uses, it should always be used in conjunction with other tools for the best probability of success. Do not put too much faith in it on its own as it is normally used to confirm a decision.
Extra weight is given to the first few points, unlike the simple moving average. Equal weight on period points are given in the SMA indicator. What is the rationale for adding weight? A quantity of traders feel that simple moving averages do not react quickly enough to drastic market movements.
To fix this problem, the exponential moving average was produced. In comparison with the SMA indicator, the EMA always responds earlier to changes in price. But it does not always do well. The quick reaction can give out many fake signals.
In a ranging market, this can be very deadly. As such, all moving averages are more often than not not used when the markets are side trending due to the number of fake indications given during this period.
The EMA crossover is a popular strategy involving this indicator. Generally, traders use the 13 as well as 5 EMA in this strategy. 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. If used when the markets are side trending, prepare to lose money.
An extra strategy involves three EMA and utilizes the cross over theory as well. Forex traders go for the EMA of 4, 9 as well as 18. When utilized, the three periods depict the short term, mid term and long term trends.
A signal to buy would crop up when both 4 and 9 exponential moving averages cross on top of the 18 EMA. Sell signals are obtained if both the 4 and 9 EMA cross below the 18 line.
While this indicator does have its uses, it should always be used in conjunction with other tools for the best probability of success. Do not put too much faith in it on its own as it is normally used to confirm a decision.
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