Moving average not only allows to smooth the price charts but also simplifies for traders the opportunity to enter or leave the market on time, which is very important while trading on the volatile market. To increase the delay, which is typical for a simple moving average, traders on the currency market often use the exponential moving average (EMA).
Exponential Moving Average Indicator
The problem of the EMA is that it delivers double signals, i.e., repeatedly reacts on one price change. First time – when the new signal is received, second – when this value is being deleted from the calculation of the average. It changes when the new price value appears.
So, unlike to simple average, EMA can react to the price change only once, in the process of its receiving. Due to this fact, the exponential average is considered to be more preferable for usage in the process of trading on Forex. The reason for this is the fact that this average provides greater importance to new data and less to the old information, thanks to this it can react on current price changes faster as well as not to be that dependent from the previous price changes. Wherein it’s possible to achieve more quality smoothing.
It’s recommended to use the exponential average as the most reliable nowadays out of all similar ones. It cuts the delay because the biggest significance is given to the most recent prices. Also, it should be taken into consideration that the importance, given to the most recent estimate, entirely depends on the length of EMA period.
It’s recommended to use exponential average as the most reliable nowadays out of all similar ones.
Such moving averages are defined via summing of certain part of the real closing price to the last value. As a result, in case of the shorter period of the EMA, bigger importance will be given to the most recent price. This will allow the curve to show on the price chart almost real price changes of the currency pairs.
This property allows the exponential moving average to have better quality relatively simple moving average. At the same time, this fact can be considered as the disadvantage of the EMA, because due to the fast reaction, it is more inclined to the perception of the wrong signals.
On the real chart, the difference between these two moving averages is not so considerable, but it is seen. Many experienced traders say that EMA reflects the price situation on the market more plausible because the previous price influence decreases exponentially in the process of it moving from the current price.
How to Use EMA
MA is used in many trading strategies and is applied in many technical indicators. Wherein, the profitability of this strategy directly depends on the period, which is used for the moving for one or another time period. The most elementary is considered to be the way of calculation of the best period, taking in consideration the average period of holding the position relative to the tempo of trading.
Also, you should understand, regardless of the correctness of the calculation of the optimal period of MA using, while testing, you always have the right to correct it to get the truest and real information.
Don’t forget about the fact that MA will always follow the available trend, but very often can give signals with the delay. Regarding the use of such averages, the flat is not as effective. The purpose of the moving average gives an opportunity to correctly define the market situation only in the case of the presence of all the corresponding conditions.