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EMA (Exponential Moving Average)
Exponential moving average (EMA) is a technical indicator that highlights the recent price changes and data points of an asset/stock/cryptocurrency while keeping the older chart observations
What Is an EMA (Exponential Moving Average)?
Exponential Moving Average (EMA) is a type of moving average (MA) that gives greater importance to the recent price data. Therefore, it is preferred by traders who are looking for recent price changes of an asset.
Unlike other moving averages, the exponential moving average (EMA) behaves quickly when the price of asset changes in the financial market. An EMA line is drawn by using the indicator and is used by traders who want to observe and act on the latest changes in the price of a particular asset/stock/cryptocurrency.
The graph of an exponential moving average (EMA) usually consists of three lines:
Whenever the candles are above the EMA lines, it represents an uptrend or in simple words, a bullish signal. Notice how the yellow line is reacting to the sudden price changes in the chart above? Observe from the left side, how two candles formed above the yellow EMA line and a bullish pattern followed. The price of this asset remained bullish as long as it didn’t come down enough to cross the purple EMA line. However, towards the end of the graph, a large candle went below the purple line and the market continued to fall. This is why EMA is highly rated by traders as it allows them to predict the next price by analyzing recent price patterns of the asset in the financial markets.
Why Is Exponential Moving Average (EMA) Used?
EMA is one of the top technical trading indicators that have a reputation for predicting the direction of the market. EMAs are frequently used in combination with other technical indicators to confirm and assess important market changes. It is particularly effective for traders who prefer to trade in fast-moving markets. This indicator is frequently used to detect a trading bias.
The calculation of EMA is a bit difficult since an EMA gives the most recent price inputs. Even though both EMA and SMA (Small Moving Averages) contribute significantly, EMA is more sensitive to market reversals and rapid price changes.
What Is the Best Setting for EMA (Exponential Moving Average)?
The ideal settings for Exponential Moving Average (EMA) are the following:
- 8-day and 20-day EMAs are more popular among day traders
- 50-day and 200-day EMAs are used mostly by long-term traders
Exponential Moving Average (EMA) Formula
Here’s how you can calculate the Exponential Moving Average (EMA):
Where EMA = Exponential Moving Average
Smoothing = 2
You can increase the smoothing factor if you want the recent price observations to have a greater influence on the EMA technical indicator.
EMA is not the only technical indicator used by traders when they are analyzing the charts of an asset in the financial markets. Other commonly used indicators (TA’s) include relative strength index (RSI), Moving Average Convergence Divergence (MACD), on-balance volume (OBV indicator), Aroon indicator, and the stochastic oscillator. Every one of these indicators works on a different mechanism where some give more weightage to price, others focus on volume, while some of these consider both variables. While trading it is beneficial to use a variety of indicators before investing in any asset.
To understand how to use technical indicators in stocks and the crypto market, please check our guide on how to use TradingView.
