3.1. what is ema
3.2. ema trading indicator
3.3. ema trading strategy
Trading on Cryptocurrency Bitcoin/Etherium with EMA (Exponential Moving Average)
The Exponential Moving Average (EMA) is a Weighted Moving Average (WMA) that gives more weighting, or importance, to recent price data than the simple moving average (SMA) does. The EMA responds faster to price changes than the SMA. The formula for calculating the EMA involves using a multiplier starting with the SMA.
The calculation for the SMA is very simple and straightforward. The SMA for any given number of time periods is the sum of the closing prices for that number of time periods, divided by that same number – basically, a mean average. There are three steps to calculating the EMA - calculate the SMA, calculate the multiplier for weighting the EMA and calculate the current EMA.
The mathematical formula, in this case for calculating a 10-period EMA is the following - SMA:
- 10 period sum/10.
Calculating the weighting multiplier:
- (2/(selected time period + 1) ) = (2/(10 + 1) ) = 0.1818 (18.18%).
Calculating the EMA:
- (Closing price-EMA(previous day)) x multiplier + EMA(previous day)
The exponential moving average (EMA) differs from a simple moving average (SMA) by more weight given to more recent data. The moving average is a reliable way of seeing where prices are headed. However, successful traders rely on a combination of technical indicators to make trades.
The EMA is very popular in Forex trading. It often even forms the basis of main trading strategies. A common forex trading strategy using EMAs is to select a shorter-term EMA and a longer-term EMA, and to trade based on the position of the short-term EMA in relation to the long-term EMA. A trader enters buy orders when the short-term EMA crosses above the long-term EMA or enters sell orders when the short-term EMA crosses below the long-term EMA.
For example, a trader might use crossovers of the 50 EMA by the 10 or 20 EMA as trading signals. Another strategy that forex traders use involves observing a single EMA in relation to price to guide their trading decisions. As long as the price remains above the chosen EMA level, the trader remains on the buy side; if the price is below the level of the selected EMA, the trader is a seller unless price crosses to the upside of the EMA.
The most commonly used EMAs by forex traders are the 5, 10, 12, 20, 26, 50, 100, and 200. Traders operating off of shorter time frame charts, such as the five- or 15-minute charts, are more likely to use shorter-term EMAs, such as the 5 and 10. Traders looking at higher time frames also tend to look at higher EMAs, such as the 20 and 50. The 50, 100 and 200 EMAs are considered especially significant for longer-term trend trading.
There are no trading strategies that will generate a profit every time, but there are basic strategies that can produce good results. One such strategy makes use of exponential moving averages (EMAs), and more specifically, the 5 and 20-period EMAs.
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