EMA Exponential Mobile Media

EMA Exponential Mobile Media
Although simple moving averages are a great tool, there is a problem associated with them. Simple moving averages are not entirely reliable.

Let's see:
Let's say we have added a 5-period simple moving average (SMA) on the 1-day chart of the EUR / USD currency pair and the closing prices for the last 5 days are as follows:

• Day 1: 1.2345


• Day 2: 1.2350


• Day 3: 1.2360


• Day 4: 1.2365


• Day 5: 1.2370

The resulting moving average is: (1.2345 + 1.2350 + 1.2360 + 1.2365 + 1.2370) / 5 = 1.2358

Pretty simple, right?

But what if the closing price of day 2 would have been: 1.23000.

The result of the simple moving average would be much lower and could give you the notion that the price goes down when in fact day 2 might have been just a punctual event (perhaps economic news for example of a drop in rates Of interest).

The point of all this is that sometimes the simple moving averages can become ... too simple. Fortunately there is a way to filter out those confusions that can give you the wrong idea and they are the Exponential Mobile Averages (EMA)

Exponential Moving Average (EMA) gives more importance to recent periods.

In our previous example, the EMA would give more importance to the 3-5 days, which means that the information of day 2 would not have had so much impact. What exponential moving averages do is put more emphasis on what Forex traders are doing NOW !.

[caption id="attachment_596" align="aligncenter" width="787"] EMA Exponential Mobile Media[/caption]

 

When trading currencies it is much more important to observe what Forex traders are doing at the moment, rather than pay attention to what they did the week or the previous month.

NOTE: This article is not an investment advice. Any references to historical price movements or levels is informational and based on external analysis and we do not warranty that any such movements or levels are likely to reoccur in the future.