An exponential moving average (EMA) is a technical tool used by traders to find the right market opportunities. It’s one of the primary strategies used for technical analysis, especially in the case of highly volatile markets. It’s often referred to as an EMA strategy and can be used to identify the dominating trend in the market. See below for a more in-depth explanation of how it works.
The basics
The exponential moving average is a derivative of the original concept of simple moving averages. The EMA line prioritizes recent price changes over historic prices, giving you a fair estimate of where the current market may be moving. By finding the right EMA indicator, investors can place a calculated trade for a commodity, stock, or currency.
By successfully tracking the EMA trend, traders can uncover key insights about the market’s movement across time. The EMA trend line can also showcase the support and resistance points needed to make the right trade.
The advantages of using EMAs in trading
There are many advantages to using exponential moving averages, as they can be leveraged by any trader at any time. Whether you’re dealing in stocks, crypto-markets, or forex currencies, you can track the EMA across different time periods to gain a better understanding of the market.
Since EMA is mapped more closely to current market fluctuations, they can provide a deeper sense of direction for a particular product. They respond more accurately to price swings in either direction, thereby giving traders a more accurate representation of what is actually happening in the market.
Calculating EMA the right way
It’s important to calculate the EMA of a market the right way. By entering the right information into your formula, you can get the right EMA line every time.
Here’s how an EMA is calculated: traders need to calculate the SMA first by taking the average across a 20-day period. The next step is to find the right multiplier that shifts the focus towards the current prices more. Then the calculation for EMA can be executed as below:
- Initial SMA = 20-period sum / 20
- Multiplier = (2 / (Time periods + 1) ) = (2 / (20 + 1) ) = 0.0952
- EMA = {Close – EMA(previous day)} x multiplier + EMA(previous day).
Understanding the EMA better
In the case where the price is trending above the moving average for the time period, there may be an upswing in the works. Traders can take advantage of this situation and make the right investment at the right time. If the trading value dips below the exponential moving average, then a down-trend may be building up.
Since EMA weighs recent fluctuations more heavily, they represent the best time to invest in the shorter term. Day-traders can take advantage of these EMA lines and find the right time to enter the market.
It’s important to note that traders cannot predict where the market will be in the future by using the exponential moving average strategy. They can find the best times to enter and exit the market in the short-term by working with recent fluctuations within the market.
Key points to remember
It’s important to use EMAs long-term for identifying general trends in a specific market. By studying market movements through the lens of EMAs, traders can find the right insights to gauge future movements.
By finding the right crossing points between shorter term and longer term EMAs, traders can analyze where they should invest next. They can place the right long or short call correctly, based on how the market has reacted over time. Traders can place the right stop-loss as well, based on how the EMA has evolved over time.