Exponential Moving Average (EMA)

The Exponential Moving Average (EMA) finds the average price of a security over a set number of periods. It gives more weight to the more recent prices, relative to older prices, in an attempt to reduce the lag associated with moving averages, in general. The weighting applied depends on the length of the moving average specified. The shorter the EMA is, the more weight that will be applied to the most recent price. The oldest price data in the EMA is never removed, but they have only a minimal impact on the EMA.

The formula for the EMA is:

The EMA is an upper technical study. ProSticks allows up to three EMAs to be plotted at one time. Default parameters of 10, 20, and 50 bars are used to calculate the EMA. Other than the Close, the High, Low, and ProSticks Modal Point are also available to use for the calculation of this Moving Average.

The EMA is primarily used as a smoothing function. Short-term price fluctuations are removed and the prevailing trend can be viewed more easily. Most traders use the EMA as a crossover trading system. Two EMAs are plotted and the shorter period EMA is used as the signal line. For example, if the shorter period EMA crosses over the longer period EMA from below to above, then it is considered bullish and a buy opportunity. Conversely, if the shorter period EMA crosses over the longer period from above to below, then it is considered bearish and a sell opportunity.

The EMA is also used as a support and resistance level. If the price moves away from the EMA and retraces back, more often than not, the EMA will prove to be a strong support or resistance, depending on the prevailing trend. Note that only certain common EMAs can be used for this purpose. 50 and 200 bars are commonly used to measure support and resistance.

Technical Indicators Explained

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