Exponential Moving Average (EMA)

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Exponential Moving Average (EMA)

Continued the previous discussion, namely Simple Moving Average (SMA) which has a deficiency in the form of false signals when there is a significant price increase when there is no significant occurrence in the market. Let everything be clear, let’s take the following EUR / USD currency pair trading chart below by plotting 5 periods with a daily timeframe.
The closing price of the last 5 days is as follows:
  • Day 1: 1.3172
  • Day 2: 1.3231
  • Day 3: 1.3164
  • Day 4: 1.3186
  • Day 5: 1.3293
Simple Moving Average (SMA) calculations are as follows:
(1.3172 + 1.3231 + 1.3164 + 1.3186 + 1.3293) / 5 = 1.3209
It’s easy, right! as the name implies Simple = Easy 🙂
Well, what will happen if on the 2nd day there is a news that influences the movement of EUR / USD prices so significantly that it closes at 1.3000. Let’s see what will happen in the 5 high schools above.
  • Day 1: 1.3172
  • Day 2: 1.3000
  • Day 3: 1.3164
  • Day 4: 1.3186
  • Day 5: 1.3293
Simple Moving Average (SMA) calculations are as follows:
(1.3172 + 1.3000 + 1.3164 + 1.3186 + 1.3293) / 5 = 1.3163
The result is that the SMA will be lower than before and will signal to you that prices are experiencing a downward trend but in reality on day 2 there is only one economic event that occurs but no significant effect on its long-term movements.
So the point of the point presented here is that high school is very simple and can sometimes fool you and me in making trading decisions. Hmmmm! If there is an indicator capable of filtering the surge above, bro 🙂 maybe we won’t be fooled in trading.
Apparently there is a bro 🙂 the solution is to use the Exponential Moving Average (EMA) inaccordance with the title of the article this time.
EMA pays attention to the most recent period, if applied in the example above, the EMA will focus on the 3rd, 4th, or 5th day. This means that the jump on day 2 will not be calculated so that it does not have a meaningful effect in the moving average.
If we think about this again that is the indicator function, this will make more sense because what the EMA does is knowing and affirming the traders’ current activities.

SMA and EMA

The following is an example of a comparison of SMA and EMA on the trading chart of the USD / JPY currency pair with a 4 hour timeframe.
Notice how the red line (30 EMA) looks closer when compared to the blue line (30 SMA). This indicates that the red line is closer to market conditions (accurate). And this happens because the EMA places more emphasis on the latest conditions that indicate the activities of market participants at this time are not activities carried out in the past.

So you will choose which one is a high school or a fantastic EMA? : P, it’s all you can answer in the next discussion, huh!

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