Exponential Moving Average

Moving Averages are used in technical analysis to determine the average price movement over time. It is calculated by adding the closing prices for a specific period. These moving averages are useful in determining market trends, spot resistance, and support levels. There are three types:

1. Simple moving average

2. Exponential Moving average

3. Moving average weighted

What's an exponential moving average?

The exponential moving average, or EMA, gives more weightage to the most recent data points. An exponential moving average responds more strongly to price changes than a simple moving one. The 12-day and 26 day EMAs are the most widely used short-term averages. The 50-day and 200 day EMAs are used for long-term trends. A reversal is indicated when the stock price reaches the 200-day EMA. The relative weighting of recent trading is lower the longer the EMA period.

What's EMA in stocks?

EMAs can be used in stock markets for both analysis and trading signals. The EMA charts display the stock's uptrend or fall. The resistance and support levels for stock are shown on the 50-day EMA charts and 20-day EMA chart. The support level indicates when the stock price starts to fall and the resistance level indicates when it begins to rise. The price breaks the trendline is a prime time to trade.

You can use the EMA to give you a direction for trading. If the EMA rises, and prices fall below or near the EMA, you might consider buying a stock. You could also sell a stock if the EMA drops and the prices rise near or above the EMA.

A price chart can be used to determine if there is a potential turn in stock prices. This allows you to plot the EMA and simple moving average (SMA). When the price trend has reversed, the point at which the short term SMA crosses the long-term EMA is the crosspoint.

EMAs can also be used in conjunction with Keltner Channels, which give buy signals.

Formula to EMA:

To calculate EMA, you can use this formula:

EMA = (Value Today *(Smoothing / 0 + Days)) + (EMA Yesterday * (1 - Smoothing / 0 + days)

Calculating EMA

First, calculate the SMA and smoothing/weighted multiplier for previous EMA to calculate EMA. SMA is the sum of closing prices for a stock over a given time divided by the same number days. The SMA for 20 Days, for example, is the sum of closing prices over the last 20 trading day, divided by 20.

The following formula can be used to calculate the multiplier of smoothing (weighting the EMA):

[2 / (selected period + 1)]

For the same period of 20 days, the multiplier would then be [2/ (20+1). This equals 0.0952.

The formula below can be used to calculate the EMA.

[Closing price - EMA (previous day)] x multiplier + EMA (previous day)

Difference Between EMA and SMA:

SMA weights all values equally, while EMA gives a greater weighting to the latest values. The EMA gives more weight to current data points than an SMA, making it more sensitive to price changes. This makes the EMA more appealing to traders and ensures that the results are timely.

EMA restrictions:

Many economists argue that EMA's efficiency is due to its dependence on historical data. They argue that current prices are the best information available about an asset and historical data won't be able provide a future direction.

Economists argue that focusing on the recent past limits the EMA's effectiveness and biases it.

Conclusion:

EMAs can be used to perform technical analysis. However, they can prove dangerous if it is not understood correctly. Moving averages don't tell us the exact top and bottom of trades, but they help us to determine the general direction.