How Exponential Moving Average Works
The exponential moving average, or EMA, gives more weight to recent price data than the simple moving average, or SMA, enabling it to react and move more quickly than the SMA. The EMA is very popular in stock, futures and forex trading, and is often the basis of a trading strategy. A common trading strategy utilizing EMAs is to trade based on the position of a shorter-term EMA in relation to a longer-term EMA. For example, traders are bullish when the 20 EMA crosses above the 50 EMA or remains above the 50 EMA, and only turn bearish if the 20 EMA falls below the 50 EMA.
However, moving averages alone are rarely the totality of a trading strategy, and most traders complement their use of moving averages with other technical indicators. While it is difficult to determine the absolute "best" technical indicators to support a basic moving average strategy, a couple of the most common ones are trendlines and momentum indicators.
Momentum Indicators
Momentum indicators, such as the average directional index, or ADX, or the moving average convergence divergence, or MACD, often indicate an upcoming change in market direction before the price moves far enough to cause a moving average crossover. Therefore, traders often use such momentum indicators as early warning signs that a market has either peaked or hit bottom. Combining both indicators can provide a robust trading system that alerts for both an entry (EMA crossover) and a take profit area (MACD/ADX).
Trendlines
Trendlines are also often used in conjunction with moving averages, as they can provide confirmation a market is in a trend or indicate it has entered a ranging area. Various trendlines drawn on a chart produce chart patterns, such as channels, triangles, etc., that can be used as additional indicators of possible future market direction.
Many traders depend heavily on the use of EMAs in their chosen trading strategies but usually include other technical indicators in their analyses as well.
FAQs
Buy signals can be detected using EMA when the short-term EMA surpasses the long-term EMA from below, suggesting a possible uptrend. For enhanced precision in analysis, it is typical to use additional indicators such as MACD and RSI alongside EMAs.
What is the Exponential Moving Average EMA indicator? ›
The Exponential Moving Average (EMA) is a technical indicator used in trading practices that shows how the price of an asset or security changes over a certain period of time. The EMA is different from a simple moving average in that it places more weight on recent data points (i.e., recent prices).
What is the best value for EMA? ›
Optimal EMA Settings for Day Traders
- Short-Term EMAs (like the 8ema or 9ema): These EMAs are ideal for capturing short-term trends and quick market movements. ...
- Medium-Term EMAs (like 21ema, 30ema, or 50ema): These provide a broader view of the market trend, smoothing out short-term volatility.
Some popular complementary indicators include the Relative Strength Index (RSI), Moving Average Convergence Divergence (MACD), and Stochastic Oscillator.
What is the combination of EMA and MACD? ›
The moving average convergence divergence (MACD) is an oscillator that combines two exponential moving averages (EMA)—the 26-period and the 12-period—to indicate the momentum of a bullish or bearish trend. MACD can be used to signal opportunities to enter and exit positions.
What is the best EMA to show trend? ›
The EMA gives more weight to the most recent prices, thereby aligning the average closer to current prices. Short-term traders typically rely on the 12- or 26-day EMA, while the ever-popular 50-day and 200-day EMA is used by long-term investors.
What is the EMA breakout strategy? ›
The 200 EMA breakout strategy is a stock trading technique that uses the 200 EMA line across multiple time frames, including one-day, four-hour, and one-hour charts. It aims to identify potential breakout opportunities and trend reversals by observing price interactions.
Which moving average is best, simple or exponential? ›
The difference between exponential And simple moving average is that EMA gives more weight to recent prices, making it more responsive to recent market changes, whereas SMA averages prices equally, leading to a more stable but slower indicator.
What are the best exponential moving averages for day trading? ›
The 5-8-13 Exponential Moving Average (EMA) combination is a favored tool among day traders, providing a responsive and precise insight into fast moving markets. By applying this EMA trio effectively along with other indicators, you can significantly refine your entry and exit points.
What EMA indicator is bullish? ›
If the EMA is sloping upward and is below the price, it generally indicates a bullish momentum. When EMA is above the price and upward-sloping it generally signifies bullish momentum, but with increased resistance. Conversely, if the EMA is sloping downward and is above the price, it may suggest a bearish trend.
Specifically, the periods of the four EMA lines are 8, 13, 21, and 34 days respectively. They are relatively short-term to capture short-term and medium-term trends. The strategy will only generate trade signals when price data satisfy the EMA crossing relationships within the specified date range.
Which EMA indicator to use? ›
Some typical EMA indicator settings are 10 and 25 for faster, more responsive curves; or 100 and 200 periods for smoother, slow-moving curves. For those who want an EMA indicator somewhere in the middle, a period of 50 might be more appropriate.
Which EMA is most accurate? ›
A 9 or 10-day moving average period is the best-moving average for intraday trading. However, 21-day EMA can be also used for day trading but you have to apply another technical indicator in combination with moving averages crossover to know the trend reversal.
Which moving average indicator is best? ›
EMA is quicker to react to the current market price because EMA gives more importance to the most recent data points. This helps the trader to take quicker trading decisions. Hence, for this reason, traders prefer the use of the EMA over the SMA.
What time frame is best for EMA indicator? ›
The EMA gives more weight to the most recent prices, thereby aligning the average closer to current prices. Short-term traders typically rely on the 12- or 26-day EMA, while the ever-popular 50-day and 200-day EMA is used by long-term investors.
What happens when 20 and 50 ema cross? ›
For example, traders are bullish when the 20 EMA crosses above the 50 EMA or remains above the 50 EMA, and only turn bearish if the 20 EMA falls below the 50 EMA.
Which combination of indicators are best for trading? ›
Here are some popular indicator combinations to get you started: Moving Average Crossover + RSI: This combo uses a moving average to identify the trend and RSI to gauge momentum. A buy signal might be when the price crosses above the moving average while the RSI is below 50 (indicating potential for upward movement).
How do you use EMA and RSI together? ›
If the 12-period EMA crosses above the 26-period EMA, look for a long position (buy). If the 12-period EMA crosses below the 26-period EMA, look for a short position (sell). - Step 3: Wait for a confirmation signal from the RSI. If you are looking for a long position, wait for the RSI to cross above 50.
