Exponential moving average

The exponential moving average (EMA) is a weighted moving average that measures a trend, both bullish and bearish, of financial security over a given period. The EMA is used in trading to determine whether the price of a security is going up or down and can help to forecast future price direction.

Moving averages are technical indicators​ that aim to ‘smooth out’ price fluctuations to help separate trends from general market activity.

 

EMA in trading

Using the EMA in trading means it adapts more quickly to changes in price action, which is an advantage over the simple moving average. As more weight is given to the recent price data and less to that which occurred earlier in the trading day, this makes it more sensitive to any change in price data and, theoretically, better for understanding in which direction the price may head next.

Therefore, the exponential moving average helps to influence traders’ decisions at the exact moment they place a trade based on the exact price movements, as opposed to what was happening on trading charts​ in the past.

This higher weight of recent price data is useful when analyzing volatile markets, where there may be abrupt price changes. It is particularly useful for identifying trends and recent swings on price charts to highlight trading patterns​. It also means that there is less of a lag, as the EMA instead reacts quickly to price changes. Therefore, developing an exponential moving average strategy is great for traders who favor short-term strategies, such as day trading in fast-moving markets.

How to use the EMA indicator

When traders use an exponential moving average indicator within their strategy, they may become buyers or long the market when the price exceeds the EMA. On the other hand, when the EMA is falling, traders may choose to sell when the price is rallying towards or just above the EMA.

The EMA can be an indicator of support and resistance levels. This is because support and resistance levels are dynamic and constantly evolving based on more recent price action. When the EMA rises, it supports the price action, while the falling EMA provides resistance to positive price action.

Example of EMA being a resistance level 

Below is Apple’s daily chart, with the blue line being the 9-day exponential moving average (EMA). 

Notice how the exponential moving average is in a downward trend in the highlight portion. 

Now notice how every time price action moves towards the 9-day exponential moving average, the price quickly falls again. 

Example of EMA being a support level 

Below is the same Apple daily chart, with the blue line being the 9-day exponential moving average (EMA). 

Notice how the exponential moving average is in an upward trend in the highlight portion. 

Now notice how every time price action moves towards the 9-day exponential moving average, the price quickly rises again. 

How to use exponential moving average to get clear buy and sell signals 

  • Use the 5 day and the 9 day exponential moving average. 
  • When the price is above BOTH the 5-day and 9-day EMA, this is a buy signal.
  • When the price is below BOTH the 5-day and the 9-day EMA, this is a sell signal. 

Here is an example of both a buy and sell signal: 

My 5-day EMA is the purple line, and my 9-day EMA is the blue line.