What is an EMA? According to Investopedia it is: ‘A type of moving average, similar to a simple moving average (SMA), that puts increased importance on the more recent data. This type of moving average reacts more quickly to recent price changes than a SMA.’ The importance given to each older piece of data declines, assigning more importance to the more current data but it does not disregard the older data completely.

In trading the markets a buy signal is generated when the price of the currency pair, stock or commodity rises above the EMA, conversely a sell signal is generated when the price falls below the EMA. Moving averages of all kinds are used by professional traders. The EMA responds more quickly to changes in price and can be more valuable than a simple moving average.

The EMA often takes the form of three, even five, such averages moving together. When the shorter term lines cross up above the medium and longer term lines it indicates a rising market and suggests the trader consider entering the market long. Of course the opposite is likewise true: when the shorter term lines cross down below the medium and longer term lines, it shows a declining market where a short position can be warranted.

An EMA can be used on most any timeframe. It provides a smoothing effect of the raw data and helps to eliminate some of the ‘noise’ in the market helping the trader to more clearly identify developing trends. Moving averages of all types work best in trending markets. In markets where prices tend to be ‘range bound’ that is to say, moving between support and resistance levels oscillators such as Stochastics, the Relative Strength Index (RSI) or the Commodity Channel Index (CCI) can often work better in helping the trader discern which position to take. Most of the better charting platforms include this suite of indicators.

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