The Exponentially Smoothed Moving Average adds the EMA indicator to find the trend’s direction on the chart. This guide will mention the indicator and how to trade it.
What is the Exponentially Smoothed Moving Average?
The Exponentially Smoothed Moving Average is a modified version of the traditional Moving Average indicator and helps determine the trend’s direction.
It places greater weight on more recent data points and less on older ones. The ESMA calculates the moving average by giving the most recent price data more weight than previous data, which allows it to react more quickly to changes in price.
Exponentially Smoothed Moving Average Strategy
There are multiple strategies you can apply with the Exponentially Smoothed Moving Average.
One common ESMA strategy is to use it to identify the market trend. When the price is above the ESMA, it is considered an uptrend; when it is below the ESMA, it is considered a downtrend.
Another popular ESMA strategy is the crossover strategy, which involves using two EMAs of different periods. When the shorter-term EMA crosses above the longer-term EMA, it is considered a buy signal, and when the shorter-term EMA crosses below the longer-term EMA, it is considered a sell signal.
You can also use the ESMA to identify key support and resistance levels. When the price approaches the ESMA, it can act as a support or resistance level, depending on whether it is above or below the ESMA.
While the ESMA works fine independently, combining it with other indicators like the RSI or MACD to reduce false signals is better.
The good thing is that the Exponentially Smoothed Moving Averages can be used on all timeframes to adjust the periods. For instance, a scalper or a short-term trader can change the period to 9 or 20, while the long-term trader can customize it to 100 or 200.
Buy Signal
- The price must cross above the ESMA.
- Wait for the price to go upward and enter the next candle.
- Place a stop-loss at the recent swing low.
- Set take-profit at the previous high or exit the trade when the price dips below the ESMA.
Sell Signal
- The price must cross below the ESMA.
- Wait for the price to go downwards and enter the next candle.
- Place a stop-loss at the recent swing high.
- Set take-profit at the previous low or exit the trade when the price goes above the ESMA.
Exponentially Smoothed Moving Average Indicator Pros & Cons
Here are the pros and cons of the ESMA:
Pros
- The indicator is easy to use.
- It produces fewer false signals than traditional moving averages.
- You can use it in multiple strategies.
- The ESMA can be applied on all timeframes.
Cons
- The indicator may not work in a choppy and sideways market.
Conclusion
The Exponentially Smoothed Moving Average is an updated version of the traditional Exponentially Moving Average indicator and produces fewer false signals. You can use the ESMA in multiple strategies at every timeframe.
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