The exponential moving average (EMA) is one of the most popular and useful indicators available to cryptocurrency traders.
A moving average (MA) is calculated by calculating the sum of closing prices from a specified number of trading periods, and then dividing the sum by the number of trading periods.
For example: a 20-day MA is calculated by taking the closing prices from the past 20 periods and then dividing the sum by 20.
An EMA is simply an MA with a different distribution curve that places more weight on recent trading periods.
As a result, EMAs react faster to sudden changes in price and are especially useful for trading breakouts.
In this post, we’ll take a look at a few examples of how to use EMAs to find high-probability entries and exits.
Choosing the Right EMA period
There’s no magical EMA period setting that will generate profitable trading signals every time.
Experienced traders often tailor the EMA period setting based on the asset they are trading. For example, a trader may choose to use EMA20 and EMA40 for BTC, and EMA30 and EMA55 for ETH.
Popular EMA periods include EMA5, EMA13, EMA20, EMA40, EMA55 and EMA200.
In general, shorter period EMAs are more useful for scalping and day trading crypto, while longer period EMAs give more insight into the past, which can be especially useful for swing trading on high-timeframe charts.
Trading EMA crosses
Look out for when two EMA lines cross. It’s a trading signal.
In the XRP/USD 15-minute chart below, there are two EMA lines: EMA20 in yellow and EMA40 in red.
The yellow arrow highlights the point where the EMA20 crossed over the EMA40.
An EMA crossover indicates a change in momentum and trend.
A shorter period EMA crossing over a longer period EMA is a bullish signal, while the opposite is a bearish signal. In this particular example, EMA20 crossing over EMA40 is a bullish signal for XRP. This chart below shows the EMA cross up close.
In many cases, the price of an asset will retest the EMA line that is farther away after a successful EMA cross.
In this chart above, you can see XRP testing EMA40 after a successful EMA cross (yellow line over red line).
The area between the two EMAs is typically a good place to enter a position in the direction of the trend
In this example, the strong support on the EMA40 line presented a good opportunity to open a long position on XRP.
Since EMA is a lagging indicator, the “best” entry and exit prices always occur before a cross happens.
In the example above, XRP started displaying bullish signs around 0.30075 USD, but the EMA20/40 cross didn’t happen until 0.30325 USD.
Similarly, the second EMA (bearish) cross didn’t happen until 0.311 USD after XRP hit a high of USD0.318.
While the EMA’s lag provides a safe buffer zone for gauging the strength of an asset’s breakout before entering a position, it doesn’t always give exit signals at the most profitable points.
It does however, give exit signals at safe points.
In the example above, entering a position at the EMA40 support test and exiting at the second EMA cross would have resulted in a 3.2% gain.
However, the chart also indicates significant bearish divergence at the local highs highlighted by the red box and descending red arrow. Technical traders would spot this instantly and heavily consider closing their position, which would have netted more profit.
In this example, entering a position at the EMA40 support and exiting at the first sign of bearish divergence would have resulted in a 4.6% gain.
The EMA is an extremely useful indicator for both beginner and advanced traders.
As you learn you explore the intricacies of this indicator, you’ll develop a keen sense of the best settings to use for each asset.
Here are a few key takeaways
- EMA5, EMA13, EMA20, EMA40, EMA55 and EMA200 are popular EMA periods to start experimenting with.
- If you’re trading EMA crosses, it can be best to wait for a retest of the EMA that is farther away from the trend direction before opening a position.
- Since the EMA is a lagging indicator, always use other indicators like RSI, volume, and candlestick analysis to find confluence for entries and exits.