Exponential Moving Average (EMA)
Candlefocus EditorA moving average is a technical indicator which is derived by taking an average of a predefined set of data points. The set of data points is often times made up of closing prices or other pertinent data points during a given data set. This particular type of moving average – the exponential moving average – gives a greater weight to the data points in the most recent portion of the data set.
When using multiple EMA’s of different durations, trends can be identified by monitoring the crossovers and divergences of these lengths. A crossover will occur when the shorter duration EMA crosses over the longer duration EMA – this is interpreted as a signal that the current direction of the market is Bullish. A divergence will occur when the shorter duration EMA falls below the longer duration EMA – this is interpreted as a signal that the trend is bearish.
The most commonly used EMA’s are:
- 10-day Moving Average - 50-day Moving Average - 200-day Moving Average
When monitoring the market with EMA’s, traders will often watch for crossovers and divergences between these different lengths to detect changing market trends. When the shorter duration EMA crosses over the longer duration EMA this signals that the current market trend is bullish while a divergence between the shorter duration EMA and the longer durationEMA signals a bearish trend. Traders also look for breakdowns and breaks of long-term EMA’s to identify possible trend changes.
With EMA, the most recent data points receive greater weight and significance. This helps traders see the most up to date price action of the underlying asset and reacts quicker to changes in the market than a simple moving average or other longer-term trend-following indicators.
Overall, the Exponential Moving Average (EMA) is a powerful tool for traders to identify short and mid-term price direction and momentum. It places greater weight on the most recent data points, helping traders see the most up-to-date price action of the underlying asset and react more quickly to changes in the market. When combined with other indicators such as crossovers and divergences between different EMA lengths, traders can successfully identify new and existing trends.