And if you’ve ever found yourself indecisive about the strategy you are to take over your security, an EMA indicator may significantly help. An EMA indicator will automatically track the price movements of your investment and reveal the trends it follows.
In this article, you’ll have the EMA indicator explained, as well as a couple of examples and step-by-step calculations. We will also discuss the significance of SMA and teach you how to set it apart from EMA.
What is an Exponential Moving Average (EMA)?
One of the most beneficial moving averages when it comes to stocks is the EMA.
In simple terms, it is a type of weighted moving average that tracks the prices of your investments through time. This unveils the price trends that occur while applying equal weight to all observations.
It always comes in comparison with the Simple Moving Average. That is because they share a purpose; however, EMA indicators react more accurately to recent changes.
How this EMA Indicator Works
In trading practices, the Exponential Moving Average indicates the movement in the prices of an asset or security. EMA indicators place more weight on the data points that have occurred recently.
The purpose of an EMA stock indicator is to determine the directions in which the security is moving in based on both past and present records. Basically, EMAs are lag indicators.
A common misconception about the Exponential Moving Average is that it can predict future prices. Although there may be a bit of accuracy to it when tried, there are risks to using a tool for what it is not meant to be used on.
So, what is EMA indicator for?
The main purpose of an EMA indicator is to either highlight or reveal the trends that the stock’s prices are currently following. Chances are that your investment may be following a trend pattern, which indicates what you should do with it depending on the trend type.
20 days is the standard for an EMA indicator, but you may also make use of shorter or longer periods. Take note that changes in the periods have an impact on the result.
Now, if you’ve decided to observe 20 days, you must first wait that many days before you can obtain the SMA, which is a crucial part of the EMA calculation. After 20 days, you may use the SMA from the 20th day as the first EMA.
To begin, you’ll calculate the SMA, then look for the multiplier for smoothing or weighting the EMA itself. Once you’ve obtained these values, you may use the formula below:
EMA = K x (Current Price – Previous EMA) + Previous EMA
Examples of How to Use EMA Indicator
EMA stock indicators work along with other weighted moving average indicators to identify movement and accuracy. You are also required to make use of other types in order to reveal the EMA value.
Only make use of this moving average if you trade in intraday and fast-moving stock markets; this is crucial for accuracy. Once you have chosen a security and finished your calculations, you are to identify the trend and respond accordingly.
For example, if the results reveal a strong upward trend within the prices, the best thing for you to do would be to exclusively trade on the long side.
The Difference Between EMA and SMA
As we have previously stated, people often associate and sometime even confuse the EMA indicator with the SMA. So let’s clear that area out.
The biggest distinguishing factor between these two moving averages is their sensitivity to data during calculation. The EMA indicator gives more significant weight to the recent prices of the security, while the SMA assigns equal weights at all times.
EMA indicators generally focus more on the recent data and only uses the older data to properly assess the trends. So if you’re looking forward to seeing the latest price changes, whether hike or plummets, EMAs are best for you.