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Using the exponential moving average (EMA) can enhance almost any trading strategy. Learn the 3-bar EMA strategy that combines the power of two short-term exponential moving averages. Throughout this EMA trading guide, we’re going to reveal some unconventional EMA techniques that can dramatically improve your trading outcomes. This EMA stock trading strategy uses 2 EMAs with the same period but with different settings.

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The EMA techniques you’ll learn today is a better approach to EMA trading than the EMA crossover indicator strategy.

To increase our edge with the EMA trade we need to use other variables. The exponential moving average is utilized by hedge funds, experienced traders, and traders that are new to the game.

Our team of experts likes to test the boundaries of what works in the markets and set new trading rules. The Exponential Moving Average is not only one of the oldest technical indicators, but it’s also a versatile tool.

Our EMA trading strategy has taken advantage of this versatility to create something very unique.

Let’s start first by putting the foundation and define what is EMA in trading and see how using EMA in trading can help us frame a trade.

# What is EMA in Trading?

The Exponential Moving Average (EMA) is a lagging technical indicator and is a type of moving average that uses an arithmetic calculation to smooth out the price.

According to Wikipedia: “In statistics, a moving average is a calculation to analyze data points by creating a series of averages of different subsets of the full data set.”

See the EMA chart below:

The most commonly used moving averages are the:

• Simple Moving Average SMAs
• Exponential moving Average EMAs

In simple terms, the simple moving average SMA is a graphic line on a price range calculated by adding up a predefined number of recent closing prices and then diving that predefined number (periods).

EMA trading aims to improve the inherent lag time of the SMA. The EMA outperforms the SMA by putting more weight on the recent price action. At the same time, the EMA puts less weight on the historical price. The EMA recognizes that more recent movements are the most relevant movements and adjusts the weight of data accordingly.

You can also view the EMA as the more reactive version of the SMA.

See on the stock chart below the difference between the SMA and EMA:

Many traders find themselves wondering: How is the Exponential Moving Average (EMA) calculated?

The EMA formula is a little bit more complex due to how the price is weighted. While the EMA is calculated automatically by your trading platform, it can help you better understand how EMA trading works.

Below we outline how to calculate the EMA using a 3-period as the settings:

• Initial SMA = 3-period sum / 3
• Multiplier = (2 / (Time periods + 1)) = (2 / (3 + 1)) = 0.5
• EMA = {Close – EMA (previous day)} x multiplier + EMA (previous day)

By using this formula, you can calculate the Exponential Moving Average and gain a unique view of the market.

# How Does EMA Work?

The basic idea is that the EMA will smooth out the price and will give us a clear picture of how the stock price has moved over a given time period. In other words, the EMA trading system can be used to see if the market is:

• Moving higher.
• Moving lower.
• Moving sideways.

By paying attention to how the EMA changes over time, you can use the EMA to also pinpoint support and resistance levels.

Let’s see how the EMA stock trading tool can be used in practice.

# How can I Use EMA for Trading?

Unlike the SMA, the Exponential Moving Average works best for trend reversals. When the EMA slope starts to shift direction from down to upwards, it potentially signals a bullish trend. Inversely, when the EMA slope starts to shift direction from up to down, it potentially signals a bearish trend.

The EMA is more sensitive to the changes in the trend due to the fact that it favors more recent prices.

Below, we'll discuss three simple ways to use the exponential moving average to buy stocks including EMA day trading.

### How can I use Exponential Moving Averages (EMA) to trade Pullbacks?

Trading pullbacks with EMA can be done profitably as long as we use a long-term exponential moving average. And, without a doubt, the 200-day EMA is probably the most powerful moving average that a trader can use.

For a valid EMA pullback setup we need two things to happen:

• First, a break of the EMA.
• Second, the price needs to move further away from the EMA, creating an empty space.

Once these two variables align together we have a powerful EMA trading setup.

Here is a stock chart highlighting this EMA stock trading strategy:

### How can I use Exponential Moving Averages (EMA) to trail your Stop Loss?

The exponential moving average provides us with great areas of dynamic support and resistance levels. This information is especially useful for traders that are placing stop loss (SL) orders.

Rather than using static levels for your stop loss, you can trail your SL above/below a relevant EMA. As an aside note, make sure you always use a buffer for your SL to account for the inevitable false breakouts.

Here is an example:

### How can I use Exponential Moving Averages (EMA) to keep you out of bad trades?

An exponential moving average is a great tool when it comes to defining well-established trends.

But, what has this to do with staying away from bad trades?

Well, it’s a well-known fact that most retail traders seem to have the tendency to go against the trends.

One simple EMA technique we can use is to look at the steepness of the EMA. If the EMA has a steep angle, it’s probably a bad idea to trade against that signal. The steeper the angle, the stronger the signal.

See the chart below for more clarity:

Secondly, the further away the price moves from the EMA the stronger the trend is, so this is another EMA technique you can use to keep you away from bad trades.

See the EMA chart below:

Next, our team of experts will teach you the best EMA trading strategy--when properly utilized, this strategy can give us more than 30 consecutive winning trades. Using the EMA does not eliminate the risk of trading, but it does make it easier to determine which trades will likely be profitable.

See below:

# 3 Bar EMA Trading Strategy

The EMA stock trading strategy can help us follow the price strength with one simple twist.

The twist is using two exponential moving averages with the same period, but calculated using two different sets of price data, namely:

• The bars’ lows.
• The bars’ highs.

Note* the inputs for both EMAs is 3-period. So we’re going to have one 3-period EMA applied to the lows and second 3-period EMA applied to the highs.

We can use the two 3-periods EMAs trading to locate chart zones that have the potential to signal short-term trend reversals. If we combine the two 3-periods EMAs we increase our odds of success.

Why are we using 2 exponential moving averages with the same period?

First, you need to keep in mind that the exponential moving averages are not magical tools. But, by using 2 EMAs with the same period, we accomplish two things:

• We encapsulate the price between the two bands.
• They can be used to form the basis of an EMA trading strategy that works.

EMA trading can be used in countless strategies, but they don’t equally perform the same.

Now, here is how to use the best EMA trading strategy.

For buy signals, we wait for both EMAs slopes to turn upwards and leave behind a sharpened EMA slope. There is no better way to explain this than by showing it directly on the price chart.

See the stock chart below:

Note* There are going to be some instances where only one of the two EMAs is going to display a sharpened slope. However, the best EMA setups are when both exponential moving averages show the same thing.

Everything is simple with this strategy and as such we close the trade once we break below the 3-period EMA that is based on the low prices.

See a full example below:

In case you haven’t noticed the two 3-period EMAs are doing a great job in eliminating the noise and reveal the trend direction. If you look closely you’ll notice that during uptrends the price has the tendency to stay glued on the 3-period EMA that is based on the highs. On the other hand, during downtrends, the price has the tendency to stay glued on the 3-period EMA that is based on the lows.

See the chart below:

Now, here is an EMA technique that you can use to take advantage of this price behavior.

For EMA sell signal, wait until you see three consecutive candles that have the open and close price near the 3-period EMA that based on the low prices. Inversely, for EMA buy signal, wait until you see three consecutive candles that have the open and close price near the 3-period EMA that based on the high prices.

See the chart below:

This EMA stock trading strategy is quite easy, but it requires self-discipline and adherence to the trading rules.

# Final Words – EMA Trading

In summary, Exponential Moving Average (EMA) trading offers you the flexibility to trade in different market conditions and it provides a complete set of trading rules. The EMA stock trading strategy combines the power of using multiple moving averages of the same periods but using different forms of calculations. These EMA techniques will allow you to find unique trading opportunities that no one else is able to spot.

Here are the most important things you need to remember:

• Exponential moving averages are more sensitive to the recent price.
• EMA offers dynamic support and resistance levels, which is good for trailing SL.
• The EMA slope shape has hidden secrets.

The rules for the EMA trading strategy can be modified to fit your own trading needs. We don’t claim this to be hard rules, but they are good on their own to make for a great trading strategy. Make sure you first test out the EMA strategy on a paper trading account before you risk any of your hard-earned money.