Learning to Trade using the Exponential Moving Average (EMA)
Beginners in trading may have heard of “Exponential Moving Average” (EMA). It is a popular technical analysis indicator that helps traders spot trends and buy/sell signals. This article explains EMA and its trading applications.
Exponential moving average?
The EMA moving average weights current price data more than older data. Calculated using a mathematical technique that smooths price changes over time. EMA is calculated using a multiplier that weights recent price data.
EMA prioritizes recent prices, making it more sensitive to market fluctuations than the simple moving average (SMA), which weighs all data points equally. EMA is popular among traders who wish to spot trends and market reversals swiftly.
EMA Calculation?
EMA is calculated in multiple steps:
Choose a 10-day EMA calculation timeframe.
Calculate the specified time period SMA.
To emphasize current prices, use a multiplier (e.g., 2 / (1 + specified time period)).
Multiple the multiplier by the difference between the current price and the previous EMA value and add it to the previous EMA value to calculate the EMA.
EMA calculations use previously computed EMA values, hence an initial EMA value is needed. This might be the first period SMA or any other value.
Trading with EMA
EMA is often used to produce trading signals and identify entry and exit locations. These are some ways traders use EMA:
Trend Identification: EMA line slope helps traders determine trend direction. Upward EMAs imply uptrends, whereas downward ones indicate downtrends.
Support and Resistance: EMA may dynamically support or resist. EMA support may be reached when price crosses above it. When the price falls below the EMA, it may function as resistance.
Signal Generation: Short-term and long-term EMA crossovers are used by traders to produce buy and sell signals. A bullish signal occurs when the short-term EMA crosses above the long-term EMA, suggesting a purchasing opportunity.
Sources and Links
Investopedia: https://www.investopedia.com/terms/e/ema.asp
TradingView Wiki: https://www.tradingview.com/wiki/Moving_Average
Technical Analysis Explained by Martin J. Pring