How to Use the EMA Indicator

The EMA indicator is used to identify trend direction, spot potential reversals, and fine-tune entry or exit points by giving more weight to recent price data, thus being more responsive to recent market fluctuations.   

In this article, we'll explain what the EMA indicator is, look at a few EMA settings for different timeframes and outline how to apply the EMA strategy in various market scenarios.  

The information in this article is provided for educational purposes only and does not constitute financial advice. Consult a financial advisor before making investment decisions.

What is the Exponential Moving Average?  

The Exponential Moving Average (EMA) is a type of moving average used to identify market trends by smoothing out price data. Like all moving averages, it looks back over a set number of periods to produce a trend-revealing line.  

However, unlike the Simple Moving Average (SMA) which gives equal importance to every data point, the EMA applies a weighting system that favours the most recent prices.  

This weightage decreases exponentially as we go back in time, thereby making the EMA more responsive to present market conditions compared to the SMA. Therefore, EMA is preferred by traders when they have a need for speedier responses to very recent price movements, such as in short-term trading.  

So, what’s the difference between EMA and SMA?   

Another important thing to note is that the EMA is calculated by combining a portion of the current price with a portion of the previous EMA value. Although the full formula can be complex, the core idea is straightforward: newer prices matter more. More on how this weighting works, why it matters will be explained in the next segment. 

Using the Exponential Moving Average Formula  

Let’s see how EMA is calculated at time ‘t’ using a formula: 

• α is the smoothing constant (also called the EMA multiplier) and always falls between 0 and 1   
• EMAt-1 is the EMA value for the previous period  

The smoothing constant (α) is determined by the number of periods n:  

 This multiplier ensures that recent prices carry more weight than older prices. Because each new EMA value depends on the previous one, the calculation builds on itself over time.  

In practice, the EMA calculation involves setting an initial value and then using the smoothing constant on the new data point. Let’s break this down with a step-by-step example for better understanding. 

The Exponential Moving Average Calculation  

In the calculation of the exponential moving average, we need a ‘Day 1’ value to start with. For this first value, we use an SMA by finding the mean of the previous ‘n’ values.  

Therefore, our starting point in the calculation of the exponential moving average is actually a simple moving average.  

To illustrate how this works in practice, let’s calculate an 8-day EMA using sample price data. The smoothing constant (α or the EMA multiplier) is determined by the standard formula: 2 / (n+1), or 2/9.  

As you can imagine, performing the exponential moving average formula with a large data set would be incredibly time-consuming. Thankfully, you won’t have to calculate the EMA by hand. Nowadays, trading platforms can plot the EMA line on a chart almost instantly for any duration you choose. 

How to Use the EMA Indicator in MT4 and MT5  

Applying the EMA indicator in MT4 or MT5 is pretty straightforward, and the process is the same in both platforms.   

To add an EMA, open the Navigator window, find Indicators, go to Trend, and select Moving Average. In the settings window, set the MA method to Exponential. The key EMA indicator settings you will adjust are Period and Shift.  

• Period refers to the ‘look-back’ period over which the EMA indicator will be calculated. The greater the period, the smoother the line; and vice versa, the smaller the period, the more sensitive the indicator will be to price changes. 
• Common selections that traders use include EMA 5, 10, 20 for short-term signals, 10 to 25 for fast trend curves, and 100 to 200 for long-term trend analysis. A 50-period EMA is often used as a mid-range setting.  
• Shift setting works by offsetting the EMA indicator along the time axis by the number which you specify. The default value for this setting is 0.  

Below is an example of a 50-period EMA plotted on a one-hour EURUSD chart. The EMA line is much smoother than the underlying price movements; it filters out the noise and still manages to track the overall direction. 

EMA Indicator Settings and Period Selection  

Choosing the right EMA indicator settings is an important part of adapting the tool to your trading style. But traders should remember that no EMA setting can guarantee profitable results and all trading involves risk.  

While the process of adding the EMA to the chart in MT4 or MT5 is the same, the EMA period selection you choose will determine how responsive or smooth the line becomes. This choice should be made carefully since indicators can produce false signals in volatile or unexpected market conditions.  

Shorter periods are more responsive to price changes, but traders should also be aware that higher responsiveness also carries a higher risk of whipsaws and potential losses. Conversely, longer periods filter out noise and show broader trends, but they may lag considerably and should not be used as the sole basis for a trading decision. 

All of this makes it important for traders to match their EMA settings to the type of strategy they use and the market conditions they are trading, and to ensure they fully understand the risks involved before making any trading decisions.  

The table below shows commonly used EMA periods by traders for different trading styles:  

Before relying on any EMA setup, traders should test several period combinations on their chosen instrument and timeframe, ideally using a demo environment. This would help in identifying which settings align with your trading approach.  

Building An Exponential Moving Average Strategy  

A double exponential moving average strategy is commonly used by traders, where there is one short-term EMA and one long-term EMA. This EMA crossover method may create a potential trading signal when the shorter EMA crosses the longer one in either direction. However, traders should remember that the EMA crossover methods may give false or unreliable signals, and no indicator will ensure profitable outcomes. 

For example, a trader might choose to use a 25-day EMA as the short-term line and a 100-day EMA as the long-term line. With this EMA crossover strategy, the trader may look to buy when the shorter-term EMA (25-day) rises above the longer-term EMA (100-day), which is called the golden crossover and may look to sell when the 25-day EMA falls below it, called the death crossover.

The chart below has a red line representing the 25-day EMA, while green is for a 100-day EMA.  

Common EMA Trading Mistakes  

While the EMA can help traders interpret market trends, it does not predict the outcomes and cannot take away the risks inherent in trading. Problems often arise when traders place too much confidence in an EMA trading system or assume that a single indicator can reliably guide decisions in all market conditions. Unfortunately, this may lead to improper risk management or unrealistic expectations of returns.   

Some common EMA-related mistakes traders often make:  

• Treating EMA entry signals as guarantees rather than as observations that may or may not align with future price movement.   
• Using EMA periods unsuited to the timeframe or volatility of the market, which can reduce effectiveness and increase the risk of misleading signals.  
• Relying on crossovers without seeking EMA confirmation from broader market context.   
• Adjusting EMA settings repeatedly in an attempt to “force” the indicator to match recent outcomes which may lead to overfitting.   
• Allowing emotions such as frustration or urgency to influence decisions more than analysis which can increase risk and should be avoided in all forms of trading.  

Advanced EMA Techniques and Combinations  

More experienced traders often use the EMA as part of broader analytical frameworks rather than in isolation. A common approach is multi-timeframe analysis, whereby EMAs from higher and lower timeframes are compared to understand broader direction while monitoring shorter-term fluctuations. Some traders also use Triple EMA setups to visualise momentum shifts more clearly.  

Sometimes EMA is paired with other tools, such as using EMA with Fibonacci retracement levels to observe how price reacts around key zones. EMA backtesting may also be helpful to evaluate how specific settings have performed historically. But historical results do not indicate or guarantee future performance.  

Final Thoughts  

The EMA indicator helps smooth price data and highlight prevailing trends in MT4 and MT5. While it can support an EMA strategy by offering potential signals, such as through crossover techniques, it still remains a lagging indicator that reacts only after price has moved.   

Its faster response compared with the SMA comes from assigning more weight to recent prices, though the curve will always depend on the period selected. A practical step for someone who is just starting out could be to test various EMA configurations in a free demo account and see which align with your trading style.  

Article you might find interesting:  

• The Top Forex Trading Indicators  
• Five Forex Indicators That Every Trader Should Know  
• Top Forex Fundamental Indicators Explained  

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