Some traders will use specific EMAs as dynamic support and resistance. Conversely, if a moving average is drifting lower over time, then the market is thought of as being bearish or negative. In other words, if the moving average is rising over time, then it is assumed that the trend is also very positive. In its most basic form though, traders tend to use the EMA as a measurement of trend. There are a multitude of uses for the EMA in Forex online trading, and quite frankly your imagination is the only limit. How the EMA is Usually Used in Forex Trading The black line is a 20-day Simple Moving Average, while the red is a 20-day Exponential Moving Average. Take a look at the chart below and notice the slight difference between the two. Which type of moving average in Forex trading should you use? Most traders use the EMA, but at the end of the day they are used in mostly the same way. This causes this type of moving average to be more immediately sensitive to price fluctuations and therefore it will change direction more quickly. The EMA in Forex trading is the same thing, except the formula is mathematically weighted to put more emphasis on the most recent candlesticks. It then plots the calculation on the chart, drawing a line through all of the dots to form a longer line across the width of the chart. By taking the average closing prices and adding them, then dividing by 20, the SMA comes up with its calculated value. As the market advances to generate another candlestick, it will simply adjust the calculation to include only the immediately previous 20 candlesticks, and so on. In other words, if the 20 SMA is plotted on the chart, it will let you know what the average price was at the closes of the previous 20 candlesticks. The simple moving average (SMA) is the straightforward moving average calculation that you would expect. While moving averages can use the open, high, low, or close price of the candlestick, 99.9% of the time you will see people use them applied to the closing prices of these candlesticks. The trader can select how many candles they want to look back at. In other words, it is the average price over the previous 20 candles, 50 candles, 100 candles, or whatever. The moving average is a plotting of the average price over the last defined number of candlesticks. To understand what it actually is, you need to understand what a simple moving average is.
“EMA” stands for Exponential Moving Average. The key word here of course is “potential.” What is an “EMA” in Forex Trading? They believe that somewhere there is a moving average that “cannot miss.” Nothing could be further from the truth, as much like anything else, a moving average is simply a tool which traders can use to define a trend, and perhaps find potential areas of support and resistance. Many believe that there is some type of “magical moving average” that the banks follow. To begin, let us debunk a myth that gets circulated amongst new traders.
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