The EMA indicator is one of the main trader’s tools in the technical analysis of the markets. What is an EMA indicator and how does it work?
EMA (exponential moving average), indicator in the form of a moving curve. This is one of the four moving averages that determine the direction of the market movement.
The exponential is calculated taking into account the values of the price of the current period, period, as well as using the closing price in the previous trading session. The exponential moving average responds to any price change in the market earlier than other indicators.
At the same time, the EMA indicator is less reliable for assessing sharp price drops or ups. (For the moments of determining the ups and downs, it is best to rely on the complementary readings of WMA and SMA).
For more efficient operation of the indicator, we recommend that you familiarize yourself with the specifics of work in each time period.
Period: what is it?
When a trader decides to use the EMA indicator, it is important to take into account the time frame and the period on which it is supposed to work.
The number of candles that are taken into account when calculating statistics is called a period. For example, an EMA with a value of 8 indicates that the period of this EMA is determined by the last eight candlesticks. This is a fast EMA.
If the EMA has a period of 100, then the EMA (100) period is determined by the last hundred candles. This is a longer EMA.
When using the EMA indicator, it is important to take into account that more significant indicators will have candles located in the last quarter of the period. These candles are more weighty than the candles located in the first quarter of the period.
Why? The fact is that the close price readings are always more important.
When is the EMA indicator used?
The EMA indicator is needed to:
- Determine the general direction of the market trend,
- To receive a signal in case of intersection of several moving averages,
- To assess the strength of support-resistance levels,
- As a complementary tool.
How to understand the EMA indicator?
The market price can change if:
- EMA moves in the direction of the traded instrument movement.
- On an uptrend, the EMA is above, and on a downtrend, it is below the conditional middle.
- An EMA curve with a short period fluctuates higher or lower than an indicator with a longer period.
The EMA indicator is good for working with an uptrend or downtrend. But if the market moves sideways, this instrument lags a little. For work, we recommend EMA with settings 55-22-13-9.
On the chart, the EMA with short periods will be above the long ones.