What is EMA Trend Following?
Exponential Moving Averages (EMA) give more weight to recent prices, making them more responsive to current price action than Simple Moving Averages. The EMA trend following strategy uses multiple EMAs to identify the prevailing trend and trade in its direction. This approach works best in trending markets.
Formula
EMA(n) = (Price × Multiplier) + (Previous EMA × (1 - Multiplier))
Multiplier = 2 / (n + 1)
Trading Rules
Buying (Bullish)
- Price is above both Fast (50) and Slow (200) EMA.
- Fast EMA crosses above Slow EMA (Golden Cross).
- Wait for a pullback to the Fast EMA to enter.
Selling (Bearish)
- Price is below both Fast (50) and Slow (200) EMA.
- Fast EMA crosses below Slow EMA (Death Cross).
- Wait for a rally to the Fast EMA to enter short.
Advantages & Disadvantages
Pros
- ✓Simple to understand and implement
- ✓Works well in trending markets
- ✓Provides clear entry and exit signals
- ✓Dynamic support and resistance levels
Cons
- ✗Poor performance in ranging markets
- ✗Lagging indicator (uses historical data)
- ✗Can give false signals during whipsaws
Disclaimer
Moving averages are lagging indicators. They tell you what HAS happened, not necessarily what WILL happen. Always use risk management and stop losses.