The oldest form of technical analysis and one of the most popular trading indicators used by thousands of traders is the exponential moving average. The reason why a moving average can be a very effective indicator is that so many traders are using these exponential moving averages and they tend to become a self-fulfilling prophecy.

An exponential moving average strategy can be used to identify the predominant trend in the market, but it can also provide the support and resistance level to execute your trade. Our team at Trading Strategy Guides has already covered the topic about trend following systems here: Make sure you go through the recommended articles if you want to better understand how the market really works. The Exponential Moving Average Strategy is really a universal trading strategy that works in all markets starting with stocks, indices, Forex, currencies and even the crypto-currencies market like the virtual currency Bitcoin.

If the exponential moving average strategy works on any type of market they for sure work for any time frame so you can trade with it on your preferred chart. The exponential moving average is a line on the price chart that uses a mathematical formula to smooth out the price action. It simply shows the average price over a certain period of time. Basically what an exponential moving average does try to reduce the confusion and the noise of the everyday price action. The exponential moving average formula is more reliable and more accurate in forecasting future changes in the market price.

There are 3 steps for the exponential moving average formula. The exponential moving average formula uses a simple moving average as the starting point for the EMA value.

Secondly, we need a multiplier that makes the exponential moving average to put more focus on the most recent price. Last but not least the exponential moving average formula brings all these values together to make up the exponential moving average. Before we go any further, we always recommend writing down the trading rules on a piece of paper.

Our exponential moving average strategy is really just comprised of two elements or simply put it two exponential moving averages. The first degree of sophistication to capture a new trend is to use two exponential moving averages as an entry filter. By using two exponential moving averages one with a longer period and one with a shorter period, we can automate the exponential moving average strategy and remove any form of subjectivity from our trading process.

The first step is to properly set up our charts with the right exponential moving averages so we could be able to identify the EMA crossover at the later stage. The exponential moving average strategy uses the 20 and 50 periods EMA. Most standard trading platform come with default moving average indicators so it should not be a problem to locate the EMA either on your MT4 platform or Tradingview. The second rule of the exponential moving average strategy is the need for the price to trade above both 20 and 50 exponential moving averages and secondly, we need to wait for the EMA crossover which will add more weight to the bullish case.

However, since the market is prone to do a lot of false breakouts we at Trading Strategy Guides need more evidence than just a simple EMA crossover. To avoid the false breakout we added a new confluence to support our view which brings us to the next step of the exponential moving average strategy. The conviction behind the exponential moving average strategy relies on multiple factors to confirm a new trading idea. After the EMA crossover happened, we again need to exercise a little bit more patience and wait for two successive and successful retests of the zone between the 20 and 50 exponential moving averages.

The two successful retest of the zone between 20 and 50 EMA gives the market enough time to actually develop a trend. We just wanted to cover the whole price spectrum between the two EMAs because the price often times will only briefly touch the shorter moving average EMA which is still a successful retest. Now, we still need to define where exactly are we going to buy which, obviously brings us to the next step of the exponential moving average strategy.

If the price successfully retests the zone between 20 and 50 EMA for the third time we go ahead and buy at the market price. We now have enough evidence that the bullish momentum is strong to continue pushing this market higher. Now, we still need to define where to place our protective stop loss and where to take profits, which brings us to the next step of the exponential moving average strategy.

After the EMA crossover happened and after we had two successive retests we now know the trend is up and as long as we trade above both exponential moving averages the trend remains intact. In this regard, we place our protective stop loss 20 pips below the 50 EMA. The last part of our exponential moving average strategy is the exit strategy which is based again on the exponential moving average.

If we would be waiting for the EMA crossover to happen on the other side then probably we would have given back some of the potential profits because we still need to consider the fact that the exponential moving averages are still a lagging indicator.

The exponential moving average formula used to plot our EMAs allow us to still take profits right at the time the market is about to reverse. However, because the market goes down much faster, we sell on the 1st retest of the zone between 20 and 50 exponential moving averages after the EMA crossover happened.

In the figure below, you can see an actual SELL trade example, using our exponential moving average strategy. The exponential moving average strategy is a classic example of how you should construct a simple EMA crossover system.

The advantage of our trading strategy stands in the exponential moving average formula which plots a much smoother EMA that give better entries and exits.

We understand that there are different trading styles and if trend following is not your thing you can try our Best Short Term Trading Strategy — Profitable Short Term Trading Tips which will reveal a short-term trading trick used by institutional traders. The exponential moving average formula below is for a day EMA: The first degree of sophistication to capture a new trend is to use two exponential moving averages as an entry filter By using two exponential moving averages one with a longer period and one with a shorter period, we can automate the exponential moving average strategy and remove any form of subjectivity from our trading process.

By looking at the EMA crossover we create an automatic buy and sell signals. Wait for the zone between 20 and 50 EMA to be tested at least twice, then look for buying opportunities. Never forget that in trading no price is too high to buy, and no price is too low to sell. Buy at the market when we retest the zone between 20 and 50 EMA for the third time. The last part of our exponential moving average strategy is the exit strategy which is based again on the exponential moving average Step 6: Thank you for reading!

More...