By identifying price directions, the EMA allows investors and traders to spot buying and selling signals based on their trading strategy. When the price is above the EMA line, it is likely to rise, and when it is below, it’s likely to fall. A rising EMA indicates that prices are on an upward trend and vice versa. Highlighting and identifying price trends are one of the most important functions of an EMA. Δ Applications of the Exponential Moving Average 1. Therefore, EMAs calculated over shorter periods are more responsive to price changes than those calculated over longer periods. The 21-day EMA places a 9.0% weight on the most recent price, whereas the 100-day EMA only places a 1.9% weight. It can be shown by calculating the value of “K” for two different time periods: The formula for calculating the EMA is as follows:Īs exemplified in the chart above, EMAs calculated over a fewer number of periods (i.e., based on more recent prices) show a higher weightage than those calculated over longer periods. So, a 21-day EMA line (orange) follows the prices more closely compared to a 100-day EMA line (yellow), as shown below:Ĭalculating the Exponential Moving Average
The 21-day EMA line moves closely with Apple’s stock price and is sensitive to volatility, which makes it a useful indicator for investors that are looking to enter or exit trades.Īn important caveat to note is that EMAs taken over shorter periods of time are more sensitive to prices. The orange line below the candlesticks is the EMA line, which indicates that the price’s been following an upward trend over the period of July 2019 – January 2020. Each candlestick shows how the price of the stock changed over one trading day (there are, on average, 21 trading days in a month), with green candlesticks indicating a rise in the stock price and red candlesticks representing price drops. The chart below shows how the price of Apple’s stock (NASDAQ: AAPL) changed over a six-month period. They are not predictive of future prices they simply highlight the trend that is being followed by the stock price. Therefore, exponential moving averages are lag indicators. The aim of all moving averages is to establish the direction in which the price of a security is moving based on past prices. The EMA is different from a simple moving average in that it places more weight on recent data points (i.e., recent prices). 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. Updated OctoWhat is the Exponential Moving Average (EMA)?
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