Moving averages are quite popular among traders. They’re the crucial tools that can help you determine if you want to use tactical or portfolio approaches. It shows you the strength of the trend and when to go long or short.
Generally, there are several moving averages, with the popular options being simple and exponential moving averages. The difference between the SMA and the EMA is its speed. The EMA changes directions earlier and moves faster than the SMA.
It identifies the price changes faster and changes direction faster than the SMA. In this article, we’ll focus more on the more powerful moving average, the Exponential moving average (EMA), particularly 21 EMA meaning.
So let’s dive right in…
What is the 21-day exponential moving average?
An EMA is a moving average that places significance and greater weight on some of the most recent points. This moving average reacts more to the most recent price changes than the SMA, which functions by applying equal weights to the observations in a certain period.
Like the other moving averages, the EMA can be used to produce sell-and-buy signals. These signals will depend on divergence and crossovers from some historical averages. And traders can use different EMA lengths, including 200-day, 50-day, 21-day, and 10-day moving averages.
The 21 day EMA is a medium-term indicator that’s more accurate for day traders. It can be quite effective when riding trends. EMA is ideal for short-term swing trading; in trends, the price respects it, and it can detect signal trend changes.
The 21 EMA can work perfectly when dealing with market dips. And unlike the 21-SMA, which assigns equal weight to the values, the 21-day EMA gives higher weight to the most recent values. For more details on the 21 day EMA meaning, please read on.
How does the 21-day exponential moving average work?
The 21-day EMA is a powerful tool that’s loved by traders worldwide. It might be powerful in the bull market, but it has several uses in the bear markets. Like the 50-day EMA, the 21 day EMA trading takes the closing values of the previous 21 days and averages them out.
The key difference between the MA and the EMA is that the recent price gets more weight. Therefore, it’s more sensitive to the recent price action. This can help you determine a change in the price’s trend. In fact, most traders prefer the 21 day EMA as it provides the best support for several weeks.
When the price breaks below this indicator, then that’s a signal for closing your positions and taking your profits. And in most cases, the profit ranges between 20% and 30%. But the market had to contend with overhead supply in the Covid-19 bear market.
And that’s because most traders were looking for selling opportunities to recoup some of their profits. Therefore, the market corrected at over 30%; in fact, very few stocks held over the 21-day line for 8 weeks after the breakout.
The 21 day EMA serves as a great support, so you may also have to use an 8-day EMA when using the 8=21 day EMA strategy. When trending over 8 and 21 day EMA, you can use the Portfolio Approach; on the other hand, when it breaks beyond these moving averages, then you can try the tactical approach.
Traders that use our xBratAlgo for Day Trading Signals, also use our EMA Cloud set on 21Day EMA for trade management. For example on the chart below we get a 5* and 6* SELL gignal on the left., then see how the price action comes to test the 21 EMA Cloud on several occasions. It acts like a non linear resistance zone. The evenentually when the price action breaks through, it is time to take profit.
21-Day Exponential Moving Average Strategy
The spy 21day EMA can work perfectly, but one of the most popular strategies is the 8-21 day EMA strategy. Knowing where these averages are can come in handy when determining how any stock extended might be in the short term. This strategy will also help you determine if the market is ripe for a retracement move.
The 8-21 day EMA strategy can serve as a great backbone in most timeframes; after all, it combines the longer-term 21-day EMA and a shorter-term 8-day EMA. Sure, you can use even shorter time frames, like a 5-20 period. But the Fibonacci base number can help you pick between 21 ema vs 20 ema. This strategy can come in handy focusing on trades between a number of days and a few weeks.
Fortunately, a month coincides perfectly with the 21-days EMA. In fact, I always use this strategy on trends to confirm trend continuations, particularly in an upsloping moving average. So you can use the 21-EMA as pullback buy points in trends showing signs of a breakout.
In an existing strong trend, purchasing dips to the 8-day EMA is an exceptional way to enter ongoing trends. When a stock makes higher lows and higher highs in a timeframe, then it is referred to as an uptrend. So you can use the 8-21 EMA crossovers to confirm if a new trend is underway.
How to use 21 day EMA (exponential moving average) for your benefit?
Besides confirming the trend or a reversal in any market, the spy 21 day EMA can also help you generate crossover signals. You can use the 8-21 day EMA to create a double crossover method. And if using the above strategy, you can use an 8-day EMA and 21 day EMA.
A bullish crossover can form when the shorter EMA crossover longer moving averages result in the creation of a golden cross. A bearish crossover occurs when the shorter EMA crosses below, the longer one. This is known as a dead cross or the death cross.
You can also use it to determine the direction of the trade and invest in the same direction. When the price of EMA falls, you should consider selling when the price goes beyond the EMA. If the price rises, you should consider purchasing when its price dips below or near the EMA.
21-Day Exponential Moving Average Calculation
Calculating the 21day EMA is quite simple, requiring one more observation. If you want to use 21 days as the number of observations, you can wait for 21 days. You can use the EMA of the previous day as the first one for yesterday.
For instance, 21-day SMA is the total of the closing prices for 21 days divided by 21. Calculate a multiplier for smoothing the EMA using this formula (2/n+1) n represent the number of observations. Finally, you can use this formula:
EMA = closing price X multiplier + EMA (previous day) X (1-multiplier).