An exponential moving average EMA is a type of moving average that is similar to a simple moving average, except that more weight is given to the latest data. It's also known as the exponentially weighted moving average. This type of moving average reacts faster to recent price changes than a simple moving average. The and day EMAs are the most popular short-term averages, and they are used to create indicators like the moving average convergence divergence MACD and the percentage price oscillator PPO.
In general, the and day EMAs are used as signals of long-term trends. Traders who employ technical analysis find moving averages very useful and insightful when applied correctly but create havoc when used improperly or are misinterpreted.
All the moving averages commonly used in technical analysis are, by their very nature, lagging indicators. Consequently, the conclusions drawn from applying a moving average to a particular market chart should be to confirm a market move or to indicate its strength.
Very often, by the time a moving average indicator line has made a change to reflect a significant move in the market, the optimal point of market entry has already passed. An EMA does serve to alleviate this dilemma to some extent. This is desirable when an EMA is used to derive a trading entry signal. Like all moving average indicators, they are much better suited for trending markets. When the market is in a strong and sustained uptrend , the EMA indicator line will also show an uptrend and vice-versa for a down trend.
A vigilant trader will not only pay attention to the direction of the EMA line but also the relation of the rate of change from one bar to the next.
Because of the lagging effect, by this point, or even a few bars before, the price action should have already reversed. It therefore follows that observing a consistent diminishing in the rate of change of the EMA could itself be used as an indicator that could further counter the dilemma caused by the lagging effect of moving averages. EMAs are commonly used in conjunction with other indicators to confirm significant market moves and to gauge their validity.
For traders who trade intraday and fast-moving markets, the EMA is more applicable. Quite often traders use EMAs to determine a trading bias. Dictionary Term Of The Day. A conflict of interest inherent in any relationship where one party is expected to Broker Reviews Find the best broker for your trading or investing needs See Reviews.
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