A common tool used is the Exponential Moving Average (EMA). But, what is it, exactly? In this article, we’ll discuss how to use EMA in trading and what type of mistakes to avoid.
The Advantages of Using EMA
Trading EMA has several advantages. This type of moving average uses the most recent price actions to help traders make decisions. It works perfectly for the fast-paced day trade environment.
An EMA stock chart responds faster to the most recent price movements. This is unlike other moving average types such as Simple Moving Average (SMA). EMA trade allows day traders to make decisions based on current market conditions. We have a perfect add-on tool for most trading platforms called the “EMA CLOUD” – Check it out HERE
In addition, it gives a reliable signal for developing trends. If the price is above the EMA line, it indicates an uptrend. However, if the price is below the EMA line, it indicates a downtrend. Traders use this signal to enter trades in the direction of the trend.
Why EMA is an Effective Trading Tool for Day Traders?
An EMA trader will look to this indicator for direction on what types of decisions to make. That’s because it’s responsive to current stock market conditions. And, as mentioned earlier, it provides a good indication of when a trend is developing.
So, EMA provides a reliable trend signal that identifies key support and resistance levels.
Additionally, day traders can customize EMA to suit their trading styles. What does this mean exactly? Well, you’re able to adjust to the best EMA settings for day trading and so, match your trading period. This helps to adjust the EMA type to suit your trading style.
As an example, a trader can choose to use a 10-day EMA period for short-term trading. However, another trader will use a 30-day EMA period for longer-term trading.
How to Trade Using EMA – A Comprehensive Guide for Traders
Now, let’s get to the serious stuff. Finding the best EMA to use for day trading, but actually knowing how to use it is another.
Three steps need to be taken in order to identify, confirm and make a trading move using EMA.
- Identify the trend using EMA. Plat the EMA on a price chart and take note of its direction. If the line goes downwards, there’s a downtrend. But, if it goes up, then there’s an uptrend.
- Confirm the trend by finding support and resistance levels. Do this by identifying points on the EMA stock chart where the price has previously bounced off support or resistance levels.
- Make a trade in the direction of the trade. So, if the trend goes up, enter a long position when the price pulls back to the EMA line.
EMA Trading: How Can You Improve Your Trading Performance?
To develop an effective EMA strategy, you need to consider a number of things.
- Use EMA together with other technical indicators such as the Relative Strength Index (RSI).
- Make use of short EMA timeframes to identify short-term trends for day trading opportunities.
- Manage risk and protect trading capital using stop-loss orders. Place it above key resistance levels when entering short positions.
- Day trading is already highly volatile, so EMA helps in this case. If there’s low volatility, the EMA may produce false signals, leading to losses.
- Identify your trading strengths and weaknesses by keeping a trading journal and getting a mentor. Monitoring your trading performance over time is very helpful, especially if you need to share this information with your stock trading coach mentor.
Common Mistakes to Avoid When Trading with EMA
EMA trade seems like a popular and reliable tool for day traders. But there are a number of mistakes you need to avoid to increase the chances of success. First, don’t over-rely on EMA and use it with other technical indicators.
Also, don’t ignore things like key support levels in the chart lines. Taking note of these helps you manage risks. Furthermore, use your stop-loss orders so that your capital is protected during highly volatile day trading.