What is Exponential Moving Average (EMA)? How to Trade with EMA Strategy on ExpertOption

What is Exponential Moving Average (EMA)? How to Trade with EMA Strategy on ExpertOption


What is Exponential Moving Average(EMA)?

EMA (also Exponential Moving Average) is a moving average indicator in Expert Option.

It differs from the simple moving average in two ways:
  • EMA indicator puts more weight on the most recent market data points.
  • It is very sensitive to recent price action than the SMA.

Consequently, you will find most Expert Option traders using the exponential moving average more often than the SMA.

And here’s why.
Looking at this example of trading using the 5-period SMA on a daily chart on Expert Option assuming the last five days closing prices look like this:

Day 1: 1.3177

Second Day: 1.3233

Day 3: 1. 3162

Day 4: 1.3287

Day 5: 1.3392

To come up with the price average, the SMA would do as follows:

Add: –

[1.3177 + 1.3233 + 1.3162 + 1.3287 + 1.3392] /5 = 1.3250

And boom! You got the price average. Simple, right?

Not so fast.

The SMA is prone to spikes in the market.

Let me explain:

Assume there was some bad news on the second day of trading that affected the price of the asset. As a result, instead of 1.3233, it closed at 1.3000. how would it affect the simple moving average?

Let’s look at it

1.3177 + 1.3000 + 1.3162 + 1.3287 + 1.3392] /5 = 1.3204

The SMA would be lower, hence giving you the notion that the price is dipping when in reality, there was an only one-time spike on Day 2 as a result of some bad news.

Why are we discussing SMA in an EMA indicator article?

Well, the point is, in some instances, the simple moving average is just that, too simple.  Making you wish for a better indicator that could help filter out these price variations in the market and give a true picture of the asset trend.

As it turns out, there is.

And that is the exponential moving average (EMA indicator).


How does Exponential Moving Average work?

Unlike its sibling, the SMA, EMA put more emphasis on the most recent prices.

What does that mean?

Going back to our example above, the most recent days would be Day 3, 4, and Day 5.

The EMA would put more weight on these prices.

This means that the spike on Day 2 is of no importance and therefore wouldn’t reflect on the final price average as it would when using the simple moving average.

Now, stop and think for a second.

Wouldn’t it be of more importance to pay attention to the traders’ most recent activities?

It is crucial.

Since you now know how the EMA works, you are ready for the next step of trading using EMA on Expert Option.


How to add the EMA to your trading chart on Expert Option

You need to be logged in to your Expert Option account to add EMA to your trading chart:

Register here if you don’t already have an account.
  • Locate the Indicators tab on the top right corner of your trading screen and click on it.
  • From the list of indicators, choose the Moving Average.
  • Then specify the period, the color, the type (here choose EMA), and finally specify the width of the line for better visibility.
  • Once satisfied, click Apply to add the EMA indicator to your trading chart.
What is Exponential Moving Average (EMA)? How to Trade with EMA Strategy on ExpertOption
Since you have added the EMA to the Expert Option account, now it’s time to look at trading strategies.

Expert Option strategies 2020 using the EMA indicator

So far, we have learned two primary roles of the exponential moving average:
  • It reduces the confusion of the price action and deafens the noise.
  • Being a moving average, the EMA smooths the price line to consequently revealing a trend in the market.

With that in mind, here are the best and popular EMA trading strategies you can adopt now and start making money on Expert Option.

Strategy 1: using the shorter-term EMA and longer-term EMA

What you are needed to do here is to add two EMA indicators on your trading chart:
  • Short term EMA (period 10).
  • Long term EMA (period 20).

This is how the two will work together to generate tradable signals:
  • Consider entering a buy position when the short term EMA intersects the long term EMA from below and continue moving above it. As a confirmation of an uptrend, you should see if the distance between the two EMA is continuously widening.
  • Enter a sell order when the short term EMA crosses the long term EMA from above and moves below it.
What is Exponential Moving Average (EMA)? How to Trade with EMA Strategy on ExpertOption
Here, you are simply leveraging the exponential moving average crossovers to generate signals on Expert Option.

Additionally, you should consider the distance between the two EMA.

That is if it is continuously widening when either in uptrend or downtrend, that’s a signal of strong momentum.

Conversely, if the distance between the two indicators starts narrowing, it is a signal that the prevailing trend is losing momentum.

Strategy 2: The Single EMA Line

This is so simple.

With this strategy, you will be making money almost immediately on Expert Option.

This is how it works:

Traders get signals based on the position of the EMA line with respect to the price line.

How?
  • As long as the price line is moving above the EMA line, you should enter a buy position because this is a sign of an uptrend.
  • When the asset is trading below the exponential moving average line, this is a sign of a downtrend, thus enter a selling position.
What is Exponential Moving Average (EMA)? How to Trade with EMA Strategy on ExpertOption
Up to this point, you are ready to place successful trades on Expert Option with the EMA indicator.

As you know, when adding the EMA to the Expert Option trading chart, you have to specify the period.

This begs the question, which is the best period to trade using the exponential moving average?

Find the answer below.


The best EMA periods to trade on Expert Option

Right off the bat, most traders use 5, 10, 20, 26, 50,100, and 200 EMA periods to trade.

On the other hand, if you are the short-term trading kind of guy, say trading on 5 or 15-minute charts, use short term EMAs such as 5 and 10.

Looking at it, the two EMAs work perfectly on the Expert Option trading platform and you can be out with a profit in no time.

Otherwise, if you wish to flex with the longer time frames, higher EMAs like 20 and 50 are perfect for you.
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