Exponential Moving Averages (EMA)

What is an EMA?

The Exponential Moving Average (EMA) is a technical indicator that shows how the price of an asset or security changes over a certain period of time. The indicator places a greater weight and significance on the most recent data points compared to the simple moving average. The aim of all moving averages is to establish the direction in which the price of a security is moving based on past prices. Thus, exponential moving averages are lag indicators. They are not predictive of future prices, and they simply highlight the trend that is being followed by the asset price.

Exponential moving average trading strategies

  • When the EMA is moving up, the trend is up. If the EMA is moving down, the trend is down. A EMA200 (200-day EMA) is a common proxy for the long-term trend. EMA50 (50-day EMA) is typically used to gauge the intermediate trend.
  • Price crossing EMA is often used to trigger trading signals. When prices cross above the EMA, you might want to go long or cover short; when they cross below the EMA, you might want to go short or exit long.
  • EMA crossing is another common trading signal. When a short period EMA crosses above a long period EMA, you may want to go long. You may want to go short when the short-term EMA crosses back below the long-term EMA.

In general, we can use the same rules that apply to SMA when interpreting EMA. Keep in mind that EMA is generally more sensitive to price movement. However, this can be a double-edged sword. On one side, it can help you identify trends earlier than an SMA would. On the flip side, the EMA will probably experience more short-term changes than a corresponding SMA.

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