J.E. Forex Exponential Moving Averages (EMAs)

Exponential moving averages plot the line of the average closing price for a given number periods. For example, the value of a 14 ema at any point is, generally speaking, equal to the average closing price of the last 14 periods. These moving averages give more weight to the most recent periods in order to avoid distortion from random price spikes. Because more emphasis is on the recent periods, exponential moving averages quite accurately represent price action.

EMAs are useful for help identifying the direction of a trend and the strength of a reversal in trend.

This daily chart of CADJPY shows the uses of exponential moving averages in trading. First, the short term 14 ema crosses the medium term 50 ema, signalling that a change in trend is possible - the 50 and 200 EMAs then cross which gives further confirmation of the change to an uptrend. Another confirmation of this change to uptrend is evident when price strongly breaks and then retests the 200 ema. The uptrend is strong, indicated by the spreading out of the EMAs during the uptrend. Moving averages show an uptrend when the shorter term EMAs are above the lower ones and show a downtrend when the longer term EMAs are above the lower (in the image the 14ema is pale blue, 50 ema is darker blue and the 200ema is black). However, a cross of moving averages is not enough on its own to decide on a trade but it can be used as an indication of future price movement, especially on higher time frames.

Time Frames

Time frames are very important to interpreting exponential moving averages. EMAs on higher time frames are much more effective than lower time frames as they provide an average of much more data. Also, a cross of EMAs on a lower time frame may signal the direction of the immediate trend, but we must always look to higher time frames to establish the full picture of price direction - momentum may temporarily push a price in one direction but the higher time frame is key to establishing long term price direction. 

EMAs as a Take Profit target

Price tends to react at some EMAs, especially the 50 and 200 on the higher time frames. You can see how in the picture above price found dynamic support at the daily 200ema and strongly rejected it, moving up a long way again. The daily 14 and 50 EMAs had crossed before the price hit the 200 ema but the price was not actually moving in to a strong downtrend - instead the price rejected the 200 ema and moved away. This shows why crosses of EMAs are not a confirmation of price direction, only an indication. Because price reacts strongly at some EMAs, we can use EMAs as price targets when entering trades. Personally, when trading breakouts of zones I look for any major EMAs between the price and the next zone - I class a major EMA as a 200 ema on most time frames and then any of the three 14, 50 and 200 EMAs on 1h time frame or higher. Price can still react at other EMAs on other time frames - this is just how I mostly interpret them.

I only trade with the 14, 50 and 200 exponential moving averages as they show short term, medium and long term information.

Retracement to the M15, 14 EMA after a strong push

The 14 EMA on m15 is, similarly to some fibonacci levels, a level where price often pulls back to after a strong push, before continuing that push. We still need to wait for candle confirmation patterns such as engulfings or morning/ evening stars etc, but if these occur at the 14ea level on m15 after a pullback from a strong push, we can get opportunities to gain further pips by taking entries. The UJ m15 chart below shows this method in action - note that h4 is strongly bullish during this move.

However, it is important to note this does not happen every time even with confirmations. As always we need to check higher tf for momentum etc as well.