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The Exponential Moving Average (EMA) is type of moving average that gives greater weightage to recent prices in an attempt to make it more responsive to new information.
An EMA is calculated by adding a percentage of yesterday’s moving average to a percentage of today’s closing value. Nowadays no need to calculate the EMA’s as most propriety software tracks these values.
EMA is a better trend following tool than SMA as it gives greater weight to the latest data and responds to changes faster than does SMA. Same time an EMA does not jump in response to the discarding older data.
EMA reacts quicker to recent price changes than does a simple moving average.
STRATEGIES FOR USING EMA
The best way of using moving averages is to identify the time frame trader interested in for tracking the price trend.
The 12 day and 26 day EMAs are the most popular used by traders.
a) For a short term trend use the 20 EMA
b) For the medium term trend use the 50 EMA
c) For the long term trend use the 200 EMA.
Traders use moving averages for different purposes. some use them as their primary analytical tool, while others simplify use them as confidence builders to back up their investment decisions.
A trader may interpret a buy signal with other moving average crossover, the faster moving average crossing over the slower moving average; however, the difference is that there are numerous crossovers. Decisions must be made as to how many crossovers must occur before a buy signal is officially triggered.
Similarly, a possible sell signal is given for the Exponential Moving Average when the moving averages begin to crossover; however, determining how many crossovers must occur before a sell signal is officially triggered is up to the stock, futures, or currency pair trader.
Common Uses of the EMA
EMAs are commonly used in conjunction with other indicators to confirm significant market moves and to gauge their validity. For traders who trades intraday and fast-moving markets, the EMA is more applicable. Very often traders use EMAs to determine a trading bias.
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