Nothing to be embarrassed about!
We all start somewhere. And if you’re feeling afraid of the risks you’re about to take, one of the best things to first learn about trading is its wide field of indicators.
One of those is the Exponential Moving Average. And now you may be asking — what does EMA mean exactly?
Well, it’s only the most popular and best-used indicator ever! Read on and learn more than just what does an EMA mean!
What is Exponential Moving Average(EMA)?
If you’ve paid quite a lot of attention to high-school statistics, you may already have quite the knowledge of the Moving Averages.
But just in case you haven’t, we’ll give you a short introduction to it.
The Moving Averages are statistical tools used for technical analysis. They specialize in calculating data points and producing a series of averages to indicate a future outcome.
The most famous of these are the Simple, Weighted, and of course, the Exponential Moving Average.
And just before you ask what does EMA mean in stocks, we’ll tell you that it means just the same.
The EMA is a type of moving average known to place greater weight on recent data points. That is exactly what sets it apart from the various other kinds of moving averages.
So when we talk about EMA stocks, we mean that the “data points” are the prices of your investment.
How EMA Works?
The Exponential Moving Average works by keeping track of the prices of your investments within a certain length. After the said length, it produces an average that will indicate your next best move for your security.
So how does it do that exactly?
Through its given length, which may vary from 10-day to 50-day, and 200-day, it determines its sensitivity to the changes. Shorter lengths tend to have higher sensitivity, while longer lengths do the opposite.
Regardless of the sensitivity, it automatically places a greater weight on the recent prices of your security and allows it to impact the overall outcome.
Now, try to remember what does EMA stand for in stocks.
That’s Exponential Moving Average. So it only means that the outcome, more commonly called the “average,” will be used to track the direction in which your security is “moving”.
These movements will signal whether you should buy or sell through divergences and crossovers. They’re lag indicators, so they also determine the trends and the patterns within their lengths.
And that’s pretty much how EMA works and its purpose in the world of trading. EMA will always be a helpful indicator, except when it is used for things that are out of their range. This is a common mistake investors make. Avoid doing so.
So if you ever find yourself lost over security, remember that you can always make use of the EMA. Now you will also be able to act accordingly a few days ahead of others.
Calculating the EMA
Now that you know what does EMA mean, let’s begin the calculation.
The very first step in calculating the EMA is to first figure out the SMA. The SMA is the Simple Moving Average, which has almost the same purpose as the EMA, but it applies balanced weight on all data points.
To calculate the SMA, you’ll have to sum up all the prices of your security within your preferred period length. Next, all you have to do is divide the sum by the number of days within the period length.
Easy as a cake!
Moving on to the EMA, first, you’ll have to select a price setting, which often ends up being the closing price. The next thing you’ll have to choose is the period length. As we mentioned earlier, you may use a 10-day, 50-day, or 200-day period.
Now let’s reveal the Smoothing Factor. All you have to do is to add 1 to the number of days on your selected period, then divide it by 2.
The last step is to multiply the SF by the new price of your security. The total will be added to the same value of the SF less 1 and multiplied to the previous EMA.
What Does the EMA Tell You?
Let’s expound on what we discussed earlier.
Now that you’ve got the Exponential Moving Average, how will you know what does EMA mean?
The “average” that you extracted from your computation of the EMA will now define the path that your security is taking. Revealing this path is crucial to determine the next best step to take before it’s too late.
So again, you may ask — what does EMA mean?
If you look at the averages, you’ll see lines that are equivalent to the price changes of your security. These lines may either rise or fall.
A rising EMA is often called a price action and is interpreted as a signal for you to buy. On the other hand, a falling EMA is known as resistance and is a signal for you to sell.
Now, remember to take action whenever these lines are either near falling or rising. If you take action once they’ve already risen or fallen, you’ll be too late.
The Difference Between EMA and SMA
The two moving averages, SMA EMA in stocks, are often either misinterpreted or wrongly exchanged with each other.
Let’s clear the confusion and distinguish them by recalling their purposes.
What does EMA mean again?
It is the Exponential Moving Average, and it is a technical indicator that places more weight on the most recent data points of a share.
And what does SMA mean?
SMA stands for the Simple Moving Average, and unlike the EMA, it places an even weight on all data points regardless of their recency.
So at the end of the day, the two are distinguishable through their sensitivity to the provided data points.
These two moving averages are widely used in the trading market and are often used alongside each other. The best use for EMA and SMA is to smooth out price fluctuations within shares.
We suggest that you only make use of the EMA and SMA indicators for intraday and fast-moving stock markets. Doing so is crucial for accuracy, and using it for other kinds may be risky.
You may also explore other kinds of moving averages you can use to help you out on your trading journey. Or, you may combine them just like the Moving Average Convergence Divergence.