The oldest form of technical analysis and one of the most popular trading indicators used by thousands of traders is the exponential moving average. Throughout this step-by-step guide, you’ll learn a simple exponential moving average strategy that has the potential to turn your trading around.

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: MACD Trend Following Strategy- Simple to learn Trading Strategy as well as the basics of support and resistance here: Support and Resistance Zones – Road to Successful Trading.

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.Also read the hidden secrets of moving average.

Now…

Before diving into some of the key rules of the exponential moving average strategy, let’s first examine what a moving average is and the exponential moving average formula.

### Exponential Moving Average Formula and Exponential Moving Average Explained

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. The exponential moving average formula puts more weight on the recent price which means it’s more reliable as it reacts faster to the latest changes in price.

Basically what an exponential moving average does try to reduce the confusion and the noise of the everyday price action. The second thing that an exponential moving average does is to smooth the price and to reveal the trend and sometimes it can reveal patterns that you couldn’t otherwise see.

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.

The exponential moving average formula below is for a 20-day EMA:

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*Initial SMA = 20-period sum / 20*

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*Multiplier = (2 / (Time periods + 1) ) = (2 / (20 + 1) ) = 0.0952(9.52%)*

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*EMA = {Close – EMA(previous day)} x multiplier + EMA(previous day).*

The general rule is that if the price trades above the exponential moving average we’re in an uptrend and as long as we stay above the exponential moving average we should expect higher prices.

Conversely, if we’re trading below an exponential moving average we’re in a downtrend and as long as we trade below the moving average we should expect lower prices.

Before we go any further, we always recommend writing down the trading rules on a piece of paper. This exercise will step up your learning curve and you’ll become a better skillful trader.

Let’s get started…

### Exponential Moving Average Strategy

### (Trading Rules – Sell Trade)

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.

#### Step #1: Plot on your chart the 20 and 50 EMA

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.

Now, we’re set to go a look more closely to the price structure which, brings us to the next step of the exponential moving average strategy.

#### Step #2: Wait for the EMA crossover and for the price to trade above the 20 and 50 EMA

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.

We refer to the EMA crossover for a buy trade when the 50-EMA crosses above the 50-EMA.

By looking at the EMA crossover we create an automatic buy and sell signals.

However, since the market is prone to do a lot of false breakouts we at Trading Strategy Guidesneed more evidence than just a simple EMA crossover. At this stage, we don’t know if the bullish sentiment is strong to push the price further after we buy so we can make a profit.

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.

#### Step #3: Wait for the zone between 20 and 50 EMA to be tested at least twice, then look for buying opportunities.

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.

Never forget that in trading no price is too high to buy, and no price is too low to sell.

Note* When we refer to the “zone between 20 and 50EMA” we actually don’t mean that the price needs to trade in the space between the two moving averages.

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 (20-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.

#### Step #4: Buy at the market when we retest the zone between 20 and 50 EMA for the third time.

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.

#### Step #5: Place the protective Stop Los 20 pips below the 50 EMA

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. We added a buffer of 20 pips because we understand we’re not living in a perfect world and the market is prone to do false breakouts.

The last part of our exponential moving average strategy is the exit strategy which is based again on the exponential moving average

#### Step #6: Take Profit once we break and close below the 50-EMA

In this particular case, we don’t want to use the same exit technique as our entry technique which was based on the EMA crossover.

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.

** The above was an example of a BUY trade… Use the same rules – but in reverse – for a SELL trade. 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.

### Summary

The exponential moving average strategy is a classic example of how you should construct a simple EMA crossover system. With this exponential moving average system, we’re not trying to predict the market but rather to react to the current market condition which is a much better way to trade the market. 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.

Thank you for reading!

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