Exponential moving average (EMA) differs from a simple moving average (SMA) in two main directions: more weight is given to recent data and EMA reacts faster to price changes than the SMA.
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EMA is very popular at Forex market, so many that it is often the basis for trading strategies. The General strategy of Forex trading that uses EMAS is based on a shorter term EMA and long term EMA and then trade based on the position of the short-term EMA in relation to the long-term EMA. A trader enters buy when the short EMA crosses above the long EMA or enter sell orders when a short-term EMA crosses below the long term EMA.
For example, a trader can use the crossovers from the 50 EMA by 10 or 20 EMA as a trading signal. Another strategy used by the traders, involves a single EMA in relation to price to guide their trading decisions. While the price remains above the selected level of the EMA, a trader on the buy-side; if the price falls below the level selected by EMA, the trader is a seller when the price crosses up EMA.
The most commonly used EMAS Forex traders 5, 10, 12, 20, 26, 50, 100, 200. Traders from the shorter timeframe charts, such as five – or 15-minute charts, are more likely to use short-term EMAS, such as 5 and 10. Traders looking at higher time frames also tend to look at higher EMAS, for example, 20 and 50. 50, 100 and 200 EMAS are considered especially important for long-term trading trends.