The EMA is widely popular in the stock exchange market. However, it works just as well for Forex trading too.
Just like all Moving Averages, the EMA is a price tracker that graphs the fluctuations over periods of time. It functions uniquely by applying more weight to the recent price points.
One of the most popular EMAs is the 200 EMA forex strategy.
This strategy focuses on long-term forex exchange investments. Its recent price point weighing is believed to work better for currencies than stocks.
In this article, we’ll discuss the entirety of the 200 EMA forex strategy. We’ll include definitions, how-tos, and benefits. We’ll even drop some tips and tricks along the way.
So, why don’t we get started?
What is the 200 EMA?
The 200 EMA multi-time frame forex trading strategy is a common technical analysis in the public trading market.
Let’s break it down into pieces, so you can have a better grasp.
The word EMA stands for Exponential Moving Average. It is part of the Moving Average family and is highly related to the Weighted Moving Average. The reason for their relationship is the EMA’s characteristic of weighing more importance on the recent price points.
The Exponential Moving Average requires the closing prices of an investment during a selected period. Its function is to indicate the investment’s condition. It does so by being sensitive to recent price fluctuations.
This is where the words multi-time frame come into play. All Moving Averages have adjustable time periods. There isn’t a standard period per Moving Average. But you may select one among the popular ones.
The 200-day moving average strategy is a 40-week period averaging an investment’s price. It is best for long-term investments and accurate indications.
How to use the 200 EMA in your Trading
Now, let’s get into actually using the 200 day Exponential Moving Average strategy.
This long-term indicator does not only identify long-term trends but also helps you profit from its strategy. Which is basically to buy low and sell high. Not to mention that it will guide you in executing positions based on large swings when it comes to major market movements.
So, how do you actually identify the trends that the daily chart is indicating?
Well, the two lines’ movements, distance, and positions should help you out with that.
For instance, if the price line is below the EMA line, it is indicating that your investment is following a downtrend. This is a signal for you to look for short trades.
On the other hand, when the price line floats above the EMA line, your investment is on an uptrend path. Which you should respond to by looking for long trades.
The farther the distances of the lines are from each other, the stronger the trend. This isn’t only by measurements but also by the deepness of the slopes on the chart.
After identifying the trend, you should confirm its validity by using shorter time frames. You should continue to shorten the time frame every time you sight clear correlations.
How to use the 200 EMA in Forex Trading?
When it comes to Forex trading, the 200 moving average strategy gets a little bit more complicated.
But, don’t get discouraged!
Because just like we did earlier, we’ll break down 200 day moving average trading strategies as well.
Forex trading requires you to make use of this indicator in a way that will benefit you and your investments. Not just buying low and selling high.
We’ll introduce you to three of the most popular and effective ways of using the 200-day EMA for forex trading.
- Directional Bias: This strategy is the simplest of them all. And it is also highly effective. Seeing a bullish trend on your Forex investment surely isn’t a good sight. With the price line being above the EMA line, it is believed that the price will continue to the upside until the 200 EMA breaks.
- Levels of Support and Resistance: Being the most popular strategy of all, EMA will surely not miss out on it. The 200 EMA Forex strategy is known to work better with an alternate form of price action confluence. Which is commonly the levels of support and resistance. Doing so produces high-quality opportunities and ideal risk-to-reward ratios.
- Trading Bounces: Believe it or not, trading rejections from the EMA is an effective strategy. Since the 200-day EMA is a strong setup, prices usually fall away from it and get rejected in its area. Which reveals the many ideal trading possibilities for you.
Advantages of 200 EMA Indicator
Now that you know what the 200 EMA Forex strategy is, how to use it, and how to read it, allow us to convince you to use it.
There are many advantages a forex trader may gain with the proper use of the EMA. One of them is being alerted regarding long-term trends before they even happen. Which allows you to take advantage of them through the generation of profit.
Unlike other Moving Averages, this indicator is known to place a greater weight on recent price points. This is an advantage because doing so allows it to react to trends faster in comparison to the SMA and WMA.
Its production of buy and sell signals is based on crossovers and divergences. This gives it a considerable percentage of accuracy.
The 200 EMA forex strategy also indicates trend reversals. It allows you to change your strategy to avoid loss. Plus, it can also alleviate the negative impacts of lag.
The Chart Below shows our Special EMA Cloud Trading Indicator set to 200 on the Daily time frame for the EURUSD Forex Pair. This clearly defines when market trends are shifting. The Numbered signals are from our xBrat ALgo Trading Indicator which can identify these reversal signals before they happen on the 200 EMA, so then using that cross of the 200 EMA Cloud is your confirmation and entry strategy.
Trading Parameters of 200 EMA Indicator
The 200 EMA forex strategy only possesses a single calculation parameter.
This parameter is the number of periods which allows the specifying period counts over which the indicator will be calculated. Its possible values range from 2 all the way to 10,000. But it’s important to note that the EMA’s default value is 10.
You may choose the number of periods in accordance with your plans, strategies, and techniques. The most common ones are 7, 14, and 26.
Remember that the lower the number, the fewer market noises the indicator filters. That means it will react faster to price fluctuations.