At the beginning of your trading career, one indicator that tends to be more popular is the moving average indicator. Interestingly, the moving average is the oldest technical analysis tool most traders rely on when trading. With a simple tweaking of the moving average indicator, we have seen traders become successful. Hardly will you find someone in the forex industry that isn’t conversant with the moving average indicator because of how effective it can be.
What is Moving Average?
The moving average is like the fundamental of “technical analysis” in forex. It is used in representing the average closing market price within a given period of time. The indicator enables traders to know the current momentum of the market. The moving average comprises of four methods with the simple moving average and the exponential moving average the most commonly used. The other two are the smoothed and linear weighted moving averages. However, our focus in this article is on the exponential moving average because of its sensitivity to the current trend.
The Importance of Moving Average
The primary reason for the moving average is to remove short-term price variations in the market. Additionally, the functionality of the moving average indicator allows traders to choose the timeframe or period that suits their trading style. Another important reason for the use of the moving average indicator is because it allows a trader to identify important support and resistance zones.
What is Exponential Moving Average (EMA?)
The exponential moving average is a moving average indicator method that places more emphasis on the recent price of the market. It responds more significantly to recent changes in the market than the simple moving average. You shouldn’t border yourself with how the EMA is calculated since it is already sorted out. Nowadays, it is easier to trade using the EMA because of the EMA crossover indicator, which gives a trader a signal when to trade. Before talking about the EMA crossover indicator, traders use the 12 and 26-day EMA to analyze short-term trades whereas the 50 and 200-day EMA are used for long-term trades. From here, you can understand the idea of the EMA crossover indicator. Generally, traders use long-term EMA (50 and 200) as signals for long-term trades or trends. The EMA crossover indicator works in a way that when the price of the currency crosses above the 200-day MA, then it indicates that a reversal is likely to take place. However, when the EMA is wrongly used, traders get confused and misinterpret their analysis. By nature, all the types of moving averages are lagging indicators, which means that they don’t respond to price movement swiftly. However, before concluding on your decision, it is advisable to use other indicators to confirm your analysis. Although the EMA also lag, it lessens this lagging to a certain extent. With this, the EMA crossover indicator is best suited when you want to derive an entry point.
How to interpret EMA Crossover Indicator
The EMA crossover indicator like other indicators in your MT4 is best suited when the market is trending. Therefore, it is important to understand when a market is trending either in an uptrend or downtrend. The EMA crossover indicator will show an uptrend when the market is in a strong uptrend and do the same in a downtrend market. A note of warning when using any EMA crossover indicator because no indicator is 100% accurate. Therefore, don’t only focus on the EMA line and forget the rate at which each bar is changing. For instance, in an uptrend, as the price actions begin to flatten ad reverse, you will observe that the EMA change rate will begin to diminish gradually until it gets to zero. Importantly, because of the lagging nature of these indicators, you may observe the flattening and reversal a little late. Trading with EMA Crossover Indicator The EMA crossover indicator can be profitable for traders who understand how to use it effectively. It is traded when the short-term EMA crosses over the longer EMA because it indicates a change in trend. Most short-term traders use the 5 and 20 EMA to enter a long or short trade. On a 4-hour chart, the 5EMA must cross over the 20EMA for a trade to be valid. However, long-term traders prefer using the 50 and 100 EMA on a daily chart. Another way of trading using the EMA crossover indicator is through breakouts. Yes, this method involves combining various EMA periods (5, 10, 50, and 100). To trade breakout using this method, you have to wait for all EMAs to closely clustered together and whatever direction the price goes, you trade the breakout. The easiest means to identify the breakout is to look at the direction of the 5 EMA, then followed by the 20 EMA and once it begins to take shape, you can enter your trade to make a huge profit. As it is always advisable when entering any trade, you should have an exit point. In using the EMA crossover indicator, it is quite easy to know what point to take profits. The 100 and 200 EMA serves as the best natural exit point because whenever you take a position against the current trend, anticipating a change in trend, the price will either be below or above the 200 EMA. At this point, the best place to exit your trade is at the 200 EMA because they act as support and resistance levels.
Conclusion EMA Crossover Indicator
The EMA crossover indicator is one of the indicators that beginners can use to make huge profits in the market. The moving average doesn’t just allow you to identify current trends but also gives you opportunities to find profitable trades. Interestingly, your job isn’t to find out how to calculate EMA because everything has been designed to work effectively. Trading is fun when you know the right indicator to use like the EMA crossover indicator. The EMA crossover indicator is all you need to chart a profitable adventure. Furthermore, there are other simple ways that can help you earn profits in Forex, so do look at them through here.