The exponential moving average (EMA) is a technical chart indicator that tracks the price of an investment (like a stock or commodity) over time. The EMA is a type of weighted moving average (WMA) that gives more weighting or importance to recent price data.
- The EMA is a moving average that places a greater weight and significance on the most recent data points.
- Like all moving averages, this technical indicator is used to produce buy and sell signals based on crossovers and divergences from the historical average.
- Traders often use several different EMA lengths, such as 10-day, 50-day, and 200-day moving averages.
- Exponential moving averages (EMAs) are designed to see price trends over specific time frames, such as 50 or 200 days.
- Compared to simple moving averages, EMAs give greater weight to recent (more relevant) data.
- Computing the EMA involves applying a multiplier to the simple moving average (SMA).
- Moving average ribbons allow traders to see multiple EMAs at the same time.
How this indicator works
- Use the same rules that apply to SMA when interpreting EMA. Keep in mind that EMA is generally more sensitive to price movement. This can be a double-edged sword. On one side, it can help you identify trends earlier than an SMA would. On the flip side, the EMA will probably experience more short-term changes than a corresponding SMA.
- Use the EMA to determine trend direction, and trade in that direction. When the EMA rises, you may want to consider buying when prices dip near or just below the EMA. When the EMA falls, you may consider selling when prices rally towards or just above the EMA.
- Moving averages can also indicate support and resistance areas. A rising EMA tends to support the price action, while a falling EMA tends to provide resistance to price action. This reinforces the strategy of buying when the price is near the rising EMA and selling when the price is near the falling EMA.
- All moving averages, including the EMA, are not designed to identify a trade at the exact bottom and top. Moving averages may help you trade in the general direction of a trend, but with a delay at the entry and exit points. The EMA has a shorter delay than the SMA with the same period.
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