In technical analysis, the 3 EMA strategy plays a very important role. Therefore, knowing how to apply the EMA moving average can help investors identify and analyze price trends in the market, thereby making the right investment decisions. In this article, let’s learn more about Forex Trading together.
What is EMA?
Before diving into how to apply EMA in Forex trading, you need to understand what EMA is. EMA (abbreviation for Exponential Moving Average) is a tool that helps investors monitor and evaluate market price fluctuations and trends in a specific cycle. The EMA is also called an exponential moving average because it is calculated exponentially.
Important and commonly used EMA full form:
- Short-term average: EMA 10, EMA 20.
- Long-term moving averages: EMA50, EMA 100, EMA 200.
Distinguish between EMA and SMA moving averages
EMA and SMA are both important technical indicators, but there are some differences between the two. To clarify this issue, traders first need to understand what is sma line. SMA, also known as simple moving average, is divided into short-term (SMA 10, SMA 14, SMA 20), medium-term (SMA 50), and long-term (SMA 100, SMA 200).
Regarding calculation, the SMA line is calculated as the average of closing prices of trading sessions in a fixed time frame. Meanwhile, the EMA is calculated using a multiplier.
They all play a role in determining support and resistance zones, but the SMA line has lower sensitivity than other technical indicators. Therefore, it often gives delayed trading signals. On the other hand, the EMA line is very sensitive to market fluctuations and flexible in updating information. Therefore, this moving average often gives faster and more accurate trading signals than the SMA line.
What is the EMA formula?
To calculate the EMA in trading, traders need to apply the formula:
EMAt = EMA(t – 1)*(1 – K) + Vt*K
In there:
- EMAt: The EMA average line needs to be calculated at the present time.
- EMA(t – 1): EMA moving average value of the previous period.
- K: Exponential. K = 2/(N + 1), where N is the period.
- Vt: Closing price on the market at the present time.
See more: Moving average: Revealing how to trade effectively!
3 EMA strategy
From the above information, traders have a clear understanding of important EMA lines and know what the difference is between EMA and SMA lines. To effectively use moving averages in trading, investors often look to the 3 EMA strategy.
What is the 3 EMA strategy?
This is a strategy that uses the intersection of 3 EMAs. These could be lines:
- EMA 10: Acts as a momentum indicator.
- EMA 30: Plays an extremely important role in determining the entry point.
- EMA 50: This indicator helps traders determine the long-term price trend of the market.
Why should you use the 3-EMA strategy?
The EMA is calculated using a multiplier. Therefore, it is extremely sensitive to small fluctuations in the market. Therefore, this strategy helps investors easily monitor and analyze price fluctuations, as well as determine appropriate entry points to increase profits. By combining 3 EMA lines, traders can also observe short-term and long-term trends in the market.
Normally, traders apply the above strategy to identify and analyze short-term trends. Traders will focus on closely following the market. From there, make future predictions and find an effective way to invest (should you follow or go against the market trend). Depending on the purpose and trading experience, traders can choose different time frames, not necessarily EMA 10, EMA 30, EMA 50.
How to apply EMA moving average
Moving average EMA can be applied in the following cases.
Identify price trends in technical analysis
By monitoring changes in the EMA, traders can identify price trends in the market today. If the EMA line increases gradually, it means the market price tends to increase. Conversely, in the case of a descending EMA, the market is trending downward. If the EMA line is horizontal, it means the market is maintaining a stable level, not increasing/decreasing suddenly.
Use moving averages in support-resistance
The EMA can also be seen as a resistance and support line. If the long-term moving average line increases and is below the price line, and the price line gradually decreases until it touches the EMA and then increases again, the EMA line at this point is the support line.
If the EMA is in a long-term decline and is above the price line, and the price line gradually increases until it touches the EMA line and then decreases again, the EMA line will act as a resistance line.
Find the order point
When applying the EMA line to find order placement points, you should note:
- If you see the EMA going up, the price line is above the EMA and starting to decrease, you need to place a buy order.
- If the EMA goes down, the price line is below the EMA and begins to gradually increase, then place a sell order now.
- If the EMA line is horizontal, it means the market is stable (Sideway). You should not trade at this time. Instead, observe and monitor new fluctuations in the market.
Combine 2 EMA moving averages
To eliminate noise signals and accurately determine the time of trading, traders can combine 2 EMA lines of 2 periods. Which includes a short-term line and a long-term line. If the short-term line crosses the long-term line in a downward direction, it means the price is trending down. Please place a sell order right now.
On the contrary, if the short-term line crosses the long-term line in an upward direction, it means the price has an upward trend. Traders need to place buy orders at this time.
See more: Discover Exness – The world’s leading Broker
Instructions for using the 3 EMA strategy in trading
Below are cases where the 3 EMA moving average strategy is applied.
When recognizing a market reversal
In this case, the 3 EMA strategy is used very effectively. Signals when EMA 10 and EMA 30, or EMA 10 and EMA 50 intersect help traders promptly monitor fluctuations on the chart. In particular, the 30 EMA is often used as a signal about an important price range. As follows:
- If EMA 10 crosses above EMA 30 and EMA 30 is below EMA 50, it signals a reversal from a long-term downtrend to an ascending one.
- If you notice that EMA 10 crosses below EMA 30 and EMA 30 is above EMA 50, it signals a reversal from a long-term uptrend to a decreasing trend.
When detecting an uptrend in technical analysis
In this case, you need to keep in mind the following when applying the 3 EMAs:
- If the market price is above the 3 EMA lines, this is a positive signal of an uptrend. This can lead to strong growth over the 3 time frames.
- If you see EMA 50 above EMA 10 and EMA 30, it means the chart is gradually losing momentum.
- If the price is below the 50 EMA, this signals that the long-term uptrend is gradually reversing, possibly starting a downtrend.
3 EMA strategy for downtrend
For downtrends, this strategy is applied as follows:
- If the price is below the 3 EMA, this is a signal of a strong downtrend.
- If the EMA 10 crosses straight above the EMA 30 above the EMA 50, then this is the time for the trader to place a buy order.
- If the 10 EMA crosses vertically below the 30 EMA and below the 50 EMA, then the trader needs to place a sell order.
Conclude
The 3 EMA strategy is very popular in Forex technical analysis. Hopefully from the above sharing, readers have clearly understood the formula and how to apply this strategy in trading. At the same time, understand what the difference is between EMA and SMA. Don’t forget to update Don’t forget to update articles Forex Trading to gain more knowledge about the Forex market.
FAQs:
Here are some frequently asked questions when using EMA that you can refer to.
Should I use multiple EMAs on the same chart?
You should avoid using too many EMA lines on the same chart. Because traders will have to receive a lot of data at the same time. This can cause you to be distracted by the amount of information, and affect the correct investment decision.
Which EMA should be used when the price is rising sharply?
Traders should use short-term EMA lines if they notice a strong increase in market price. Thus, you will find the entry point promptly and accurately.
Does applying EMA in sideway mode bring trading efficiency?
The sideway state is a stable market state, with no sudden price fluctuations. Meanwhile, the EMA line is most effective when the market price shows an up/down trend. If the market is in a sideway state, you should not rush to apply the strategy. Instead, observe and wait for the next market movement.
