Introduction
The exponential moving average (EMA) is a specialized chart indicator that tracks the value of an asset over time. It is a sort of weighted moving average (WMA) that provides more weighting or significance to ongoing valuable information. As like the simple moving average, the exponential moving average is utilized to see value patterns over time, and observing a few EMAs at one time is simple to do with moving normal rebinds.
What Is an Exponential Moving Average (EMA)?
An exponential moving normal (EMA) is a kind of moving average (MA) that puts a more noteworthy weight and sharpness on the latest information points. The exponential moving average is likewise alluded to as the exponentially weighted moving average. An exponentially weighted moving average responds more essentially to ongoing value changes than a straightforward moving average (SMA), which applies an equivalent weight to all observations in the period.
In the below image, you can see a naked chart of EURUSD
Now let’s plot the exponential moving average in the chart to see how it looks like
The Formula of Exponential Moving Average (EMA)
EMAToday =
(ValuetToday ∗ (Smoothing / 1+Days)) + EMAyesterday * (1 - (Smoothing / 1+Days))
Where: EMA = Exponential Moving Average
While there are numerous potential choices for the smoothing factor, the most widely recognised choice is 2
That gives the latest observation exceeding weight. In the event that the smoothing factor is expanded, later observations have more effect on the EMA.
Calculating the EMA
Calculating the EMA needs one more inspection than the SMA. Assume that you need to utilise 34 days as the number of inspections for the EMA. At that point, you should hold up until the 34th day to gain the SMA. On the 35th day, you would then be able to utilise the SMA from the earlier day as the first EMA for yesterday.
The calculation for the SMA is clear. It is essentially the entirety of the stock’s closing prices during a time span, divided by the number of inspections for that period. For instance, a 34-day SMA is only the entirety of the closing value for the previous 34 trading days, parted by 34.
34 EMA with Trendline Breakout Strategy
By combining the exponential moving average indicator with the price action context, the 34 EMA with trend line breakout forex trading strategy has established. In a decent trending market, this forex trading system is an entirely dependable trading strategy that can pull in plenty of pips effectively into your forex trading account.
To demonstrate it, simply proceed to do a little backtest on previous price history, and you will perceive what I’m discussing after you’ve learnt the trading methods and layouts which are additionally clarified underneath.
Timeframes
The 34 exponential moving average trading technique functions admirably in all timeframes from 5 minutes to weekly charts. The higher time frames can give better trading outcomes. However, it is best to stay on the 1 hour to daily chart as it can give high accuracy trades.
Currency Pair
There are no rules to utilise a currency pair. Still, it is good to utilize a forex pair that often remains in the range, for instance, EURUSD. However, all major and minor forex pairs are free to go with this trading technique.
Buy Entry
- First, draw a downward trend line and look for an upward breakout.
- If the breakout has happened, then the price must be residing above the 34 EMA.
- After the downward trend breakout has happened, look at the highs of the bullish candlestick that form.
- The signal candle is the candle with a high that is lower than the last candle’s high. So, if the signal candle’s high is broken, at that point, enter a buy trade immediately. On the other hand, you can put in a buy stop order only a couple of pips over the high of that signal candle so if the price breaks signal candle’s high, your order will be placed.
- If your buy stop order isn’t executed and the candles keep on making lower highs, move your buy stop order to every lower high candle that structures until the price goes up and executes your trade.
- It’s always better to place a stop loss below the downward trend line breakout candle.
Sell Entry
- First, draw an upward trend line and look for a downward breakout.
- If the breakout has happened, then the price must be residing below the 34 EMA.
- After the upward trend breakout has happened, look at the lows of the bearish candlestick that form.
- The signal candle is the candle with a low that is higher than the last candle’s low. So, if the signal candle’s low is broken, at that point, enter a sell trade immediately. On the other hand, you can put in a sell stop order only a couple of pips over the low of that signal candle so if the price breaks signal candle’s low, your order will be placed.
- If your sell stop order isn’t executed and the candles keep on making higher lows, move your sell stop order to every higher low candle that structures until the price goes down and executes your trade.
- It’s always better to place a stop loss above the upward trend line breakout candle.
Limitations of the EMA
It is hazy whether or more emphasis ought to be put on the latest days in the timeframe. Numerous traders accept that new information better mirrors the current pattern of the asset. Simultaneously, others feel that overweighting current dates makes a preference that prompts to more bogus alarms.
Correspondingly, the EMA depends completely on authentic information. Numerous economists suspect that business sectors are proficient, which implies that current market value meanwhile mirrors all accessible data. If the markets are actually proficient, utilising authentic information should disclose to us nothing about the upcoming movement of security prices.
Summary
Let’s summarise the 34 exponential moving average with trendline breakout trading strategy:
- You should look for an impulsive trendline breakout.
- After the trendline breakout has happened, the price must be above or below the 34 EMA (depending on buy and sell entry).
- It’s always better to put the stop loss below or above the trendline breakout candle.
- Better money management can give you a better risk/reward ratio.
Moreover, you need to practice this trading strategy until your win ratio reaches above 60 per cent, and you must have to control your emotion and psychology for better outcomes.
