Exponential Moving Average (EMA)
Last updated
Last updated
EXPONENTIAL MOVING AVERAGE (EMA) is a type of moving average (MA) that places a greater weight and significance on the most recent data points.
The exponential moving average is also referred to as the exponentially weighted moving average. An exponentially weighted moving average reacts more significantly to recent price changes than a simple moving average (SMA), which applies an equal weight to all observations in the period.
Bullish signal: The shorter EMA cross above the longer EMA
Bearish signal: The shorter EMA cross below the longer EMA
Two exponential moving averages can be used together to generate crossover signals.
EMA1 length: 12
EMA2 length: 26
Double crossovers involve one relatively short exponential moving average and one relatively long exponential moving average. As with all exponential moving averages, the general length of the exponential moving average defines the timeframe for the system.
A bullish crossover occurs when the shorter exponential moving average crosses above the longer exponential moving average. This is also known as a golden cross. A bearish crossover occurs when the shorter EMA crosses below the longer exponential moving average. This is known as a dead cross.
EMA crossovers produce relatively late signals. After all, the system employs two lagging indicators. The longer the exponential moving average periods, the greater the lag in the signals. These signals work great when a good trend takes hold. However, a EMA crossover system will produce lots of whipsaws in the absence of a strong trend.
Bullish signal: The EMA cross above the price
Bearish signal: The EMA cross under the price
EMA length: 89
EMA can also be used to generate signals with simple price crossovers. A bullish signal is generated when prices move above the EMA. A bearish signal is generated when prices move below the EMA.
Price crossovers can be combined to trade within the bigger trend. The longer EMA sets the tone for the bigger trend and the shorter EMA is used to generate the signals. One would look for bullish price crosses only when prices are already above the longer EMA. This would be trading in harmony with the bigger trend.
EMA can also act as support in an uptrend and resistance in a downtrend. A short-term uptrend might find support near the EMA(20), which is also used in Bollinger Bands. A long-term uptrend might find support near the EMA(200), which is the most popular long-term EMA.
In fact, the EMA(200) may offer support or resistance simply because it is so widely used. It is almost like a self-fulfilling prophecy.
