How to Use Exponential Moving Average in Forex Trading - ForeXposed


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Thursday, September 7, 2017

How to Use Exponential Moving Average in Forex Trading

Exponential Moving Average (XMA) is improved methods of Simple Moving Average (SMA). As we know, the weighting of SMA is cause for the delay in the trends change signals. The weighting on XMA is just as well on WMA (Weighted Moving Average), involving the periods. 

The difference is when we using WMA, the longer the periods the greater the weighted of the last value. The contrary occurs in XMA, the longer the periods we use the smaller the last value weighted.

Overall, the XMA basics are the same as SMA, because it is same the way to calculate it, only have a difference in weighting values. Here's the summary: 

1. XMA is below the price.
Bullish conditions / Uptrend.
2. XMA is above the price.
Bearish conditions /Downtrend.
3. XMA is crossing the price from below.
Trend changes toward bearish.
4. XMA is crossing the price from above.
Trend changes toward bullish.
5. The shorter XMA periods is crossing the longer XMA periods from below.
Trend changes toward bullish.
6. The shorter XMA periods is crossing the longer XMA periods from above.
Trend changes towards bearish.
7. The longer XMA periods is above the shorter XMA periods.
Bearish conditions / Downtrend.
8. The longer XMA periods is below the shorter XMA periods.
Bullish trends / Uptrend.

Well, the picture below is the application in predicting the trends that will occur using XMA. How to use it is exactly the same as using SMA.

The image below is an example the using of XMA 10 periods on GBPUSD charts.

How to Use Exponential Moving Average in Forex Trading

And just like any other Moving Average, XMA is more often used by using two different periods:

How to Use Exponential Moving Average in Forex Trading
Simple Moving Average (SMA), Exponential Moving Average (XMA), Weighted Moving Average (WMA), which is better?

Well, this may be the last remaining question from the Moving Average (MA) explanations. Where among these variants of indicators is the most excellent MA?

Seen from the giving of the bullish or bearish signal, indeed XMA is an indicator that can provide early signals than others. Of course, because XMA indeed was created to eliminate the weakness of MA predecessors. But if the question is which is better, this becomes very relative, depending on the user.

As a guide, the more sensitive an indicator will indeed be very helpful to predict the price. But on the contrary, the more sensitive it will be more in giving the false signal produced, which means that the signal could be given was wrong or did not last long. That is why all is depending on the forex trader.

If you are preferred to more safe games, SMA may be a better fit than other variants. And vice versa if you are a risk taker (which also means the gain possibility is as great as the risk) then the XMA would be better according to you because it is more responsive and faster in giving the signal. If you are an adherent of the midline, please use WMA. A clear indicator is only an instrument, we are the one who determines the decision based on the instrument hints.

In fact, if calculation through Mean Absolute Percentage Error (MAPE) take place, XMA will give a smaller error than the other. However, it does not mean XMA is the absolute best. I deliberately did not include calculations with the MAPE because it is very relative.

We will meet at next chapter to analyzing the forex market using other indicators.