Exponential Moving Average Definition
The exponential moving average (EMA) is a product of statistical analysis. I remember listening to my professor talk about EMAs in undergrad and never did I believe I would be using this powerful price indicator to make a living in the markets. The EMA is very much like the simple moving average, except the average is weighted to place emphasis on the most recent price action. The reason many technical analysts prefer the EMA is its ability to reduce the lag between EMA crosses, which acts as buy and sell triggers for active traders. The EMA is also used to construct other indicators, such as the ADX and MACD.
Exponential Moving Average Formula
The Exponential Moving Average is calculated with the following formula (courtesy of stockcharts):
EMA(current) = ( (Price(current) – EMA(prev) ) x Multiplier) + EMA(prev)
Depending on the period you are using, the EMA will apply a percentage for how much the recent price action is weighted:
For example, a 10-period EMA’s Multiplier is calculated like this: (2 / (Time periods + 1) ) = (2 / (10 + 1) ) = 0.1818 (18.18%)
Exponential Moving Average Chart Examples
Below are some trading examples of buy and sell signals using the Exponential Moving Average. As always, these are for illustration purposes only and if you simply trade on crosses of the EMA without a trading plan, you will lose money.