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What is Exponential Moving Average (EMA)?
EMA or Exponential moving average is one of the types of moving average (MA) and is used in trading practices that show the rate of change in the price of an asset over a specific period of time. This moving average highly emphasizes on the most recent price data. Unlike, SMA the EMA is much more powerful and can give you much more accurate results.
Talking, about the calculation of EMA, If you have read my previous article on SMA. You must have understood how easy it is to calculate the average price of security using SMA. You just needed to add the closing price data of a security divided by the number of periods. However, the calculation of EMA is a bit tricky and requires some mathematics. But the good news is that you are here for trading and therefore you don’t need to understand or apply mathematics as the calculation work is already done by Pocket Option software.
Key Points About Exponential Moving Average
- The Exponential moving average is one of the types of moving averages that emphasises more weight on the most recent price data while calculating the average.
- The calculation of EMA ( Exponential moving average) is a bit more tricky than SMA ( Simple moving average ). The Exponential moving average uses a mathematical formula where it assigns more weight to each price data point with greater emphasis on the most recent one.
- The Exponential moving average is considered more accurate than the Simple moving average as it reacts much faster to the price changes. Traders often use Exponential moving average in short-term trading strategies.
- The EMA filters out unnecessary market noises caused by short-term volatility and fluctuations. The degree of smoothening depends on the length of the indicator period. Shorter indicator period are more responsive but less smoothing while the longer period is much smoother but with slow reactions to the price changes.
How to find and configure EMA on Pocket Option?
Naturally, you need to log in to your account first just enter your email, password, & click sign in. next click on the indicator box and select moving average from the menu.
Secondly, click on the pencil icon.
Now, change the timer of the moving average to 14 and make sure to set the moving average to 14.
Once again, click on the indicator and select moving average and set the timer to 29 and select moving average as EMA.
Lastly, change the colour by clicking on the pencil icon and select the styles menu. make sure to set the two different colours for the two lines for better visiblity.
How to trade with the EMA indicator?
Trading with the EMA indicator is as easy as trading with the SMA indicator. You just need to focus on the intersection of two lines.
When line 14 cuts line 29 from the bottom and later line 14 is above line 29 is a signal of a bullish trend. and here we can place a buy trade. I will suggest you place a buy trade only when line 14 is above line 29 for a long duration of time.
Similarly, when line 14 intersects line 29 from the top and later stays below line 29 is a signal of a bearish trend. You should place a sell trade only when line 29 is above line 14 for a good amount of time.
So, trading with an Exponential moving average so easy. If you want much better results you can combine it with Support and Resistance. If you get a buy signal from an Exponential moving average near the support level it indicates a strong bullish trend similarly, if you get a sell signal from an exponential moving average near the resistance level it indicates a strong bearish trend. You can try this strategy for free on the Pocket Option demo account. Click here to get started and do comment below your thoughts or if you want me to make any corrections.