TRADINGSIM DAY TRADING BLOG

Exponential Moving Average (EMA) – Technical Indicator

11 Flares Twitter 2 Facebook 8 Google+ 1 Filament.io 11 Flares ×

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.

EMA Buy Signal:

EMA Buy Signal

EMA Sell Signal:

EMA Sell Signal

Alton Hill

Alton Hill

I am a co-founder of Tradingsim.com and an IT professional that specializes in large scale Systems Integration projects. I have actively traded the markets since 2000 and believe that true trading mastery comes from practice. When I'm not working on a new trading strategy, I enjoy spending time with my wife and kids.
Alton Hill

Comments

  1. Xazzer_x says:

    Thanks for sharing such information… It is very beneficial for me. Thank you!!

  2. Xazzer_x says:

    Thanks for sharing such information… It is very beneficial for me. Thank you!!

  3. this is great…

  4. this is great…

  5. experience says:

    There were a total of 16 EMA Crosses to the down side in your example. So my question is WHICH down side cross is the sell signal? Unless you have some other indicator to tell you which one to use you have a signal that loses you money because of all the false signals. In reality the market goes sideways longer than a trader could remain solvent using this signal alone. 

11 Flares Twitter 2 Facebook 8 Google+ 1 Filament.io 11 Flares ×
Welcome to Tradingsimright arrow collapse