Exponential Moving Average (EMA)

A more advanced version of the Simple moving average. It is a line on the chart which indicates what the average price is at any given time. The difference between the two is that the Exponential moving average will give more meaning to the periods that are closer to the present and less meaning to the periods of time which are further away from the present, while the simple moving average will treat the time line equally.

Why should I use it?

The exponential moving average can be used exactly as the simple moving average is used, that is, it can help you spot the current trend, recognize a possible change in trend, and can also point out levels of support and resistance.
Many professional traders choose to use the exponential moving average over the simple moving average, since they claim the recent past is more important for market prediction compared with the old past.

How does it look like?

The Simple Moving Average is composed out of one dynamic line drawn over the chart. The line shows you the average price for any time period in the past and present.

How dose it work?

We call it a moving average because it is moving together with time, constantly changing the average price with every new time unit.
In order to use the EMA you need to choose which time period you would like for calculating the average. If you open a 1 hour chart of USDJPY and then choose an Exponential Moving Average of 10, the chart will show you the current average price of the last 10 hours. If you open a daily chart of USDJPY and then chose an Exponential Moving Average of 10, the EMA line will show you the average price for the last 10 days.
Let's observe a few simple ways you can use a EMA in your trading:
Spotting a trend
When the EMA is constantly moving up, the market is in an up trend and the price is most likely trading above the EMA. If you believe the trend is going to continue, use the opportunity to buy when the price is correcting back to the EMA line. Conversely, when the EMA is moving constantly down, the market is in a downtrend and the price is trading under the EMA line. You can use the corrections back to the EMA as sell opportunities.
Notice that when the EMA line is moving sideways, it means the market is not in a trend, but rather in a rage (hyperlink: trading range).
Notice that when the EMA line is moving sideways, it means the market is not in a trend, but rather in a rage (hyperlink: trading range).
This is a very popular strategy which uses two moving averages with different time periods to find out when a change in the market's directions is likely to happen. For instance, open a chart and place two Exponential Moving Averages on it. A short one of 10 periods, and a long one of 21 periods (you can choose any time periods you think are best).
Every time the short Exponential moving average of 10 (10EMA) is crossing the long EMA of 21 (21EMA) from below upwards, this will indicate a possible new up trend, and a buy signal. Every time the 10EMA is crossing the 21EMA from above downwards, this will indicate a possible new downtrend, and a sell signal.

Example

Below is an example of the cross-over strategy. Here there are two different Exponential Moving Averages. The first one is of 21 periods (red) and the second one is of 9 periods (blue). The blue is therefore the signal line. In this case, when the blue EMA crosses the red EMA from above downward it triggers a sell signal- as the trend in the market is changing from an uptrend to a down trend.