This is the second article in our EMA series. The EMA was designed to smooth out the effects of price volatility and create a clearer picture of changing price trends. Traders use an EMA, sometimes in concert with another EMA for a different period, to signal confirmation of a change in price behavior. The benefit of the EMA indicator is its visual simplicity. Traders can quickly assess the prevailing trend of price behavior from the direction of the EMA.
Care must be taken since the EMA is a lagging indicator and may not adjust rapidly to volatility in the market. The EMA indicator will respond more rapidly than an SMA with forex moving average trend settings since recent prices are given more weight. False signals will prevail if an EMA is used in a ranging or sideways trending market, especially one with a short setting.
The key points of reference are when the EMA crosses over the pricing candlesticks or another EMA. Skill in interpreting and understanding EMA alerts must be developed over time, and complementing the EMA tool with another indicator is always recommended for further confirmation of potential trend changes. In the next article on the EMA indicator, we will put all of this information together to illustrate a simple trading system using EMA analysis.
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