What Is Exponential Moving Average (EMA)?
Cryptocurrency trading requires logical patience and willingness to learn new things. Developing a profitable trading strategy demands knowledge of all the relevant trading tools users can leverage. Here we shall explore one of such tools, the Exponential Moving Average (EMA), a trading indicator.
The exponential moving average (EMA) is a weighted moving average (WMA) that gives more preference to recent price data. Unlike the Simple moving average (SMA), the EMA is updated with the latest price movements in the market. EMA also response faster to recent price changes than SMA.
The formula used for calculating EMA involves a multiplier, a factor when changed causes subsequent changes in other related variables. Calculating EMA starts with the SMA. SMA is given by the sum of the asset closing prices divided by time periods passed. The 10-day SMA of an asset equals the sum of closing prices for the past 10 days is divided by 10.
How To Practice Calculations?
There are three steps involved in calculating EMA:
1. Calculate the SMA.
2. Calculate the multiplier for weighting the EMA.
3. Calculate the current EMA.
The mathematical formula for calculating EMA for a 10 day period is summarized as;
- SMA: the sum of closing prices in the 10 day periods ÷10.
- Calculating the weighting multiplier: [2 ÷ (selected time period + 1)] = [2 ÷ (10 + 1)] = 0.1818 or 18.18%
- Calculating the EMA: [Closing price-EMA (previous day)] x multiplier + EMA (previous day)
The weighting given to the most recent price is greater for a shorter-period EMA than for a longer-period EMA. For example, an 18.18% multiplier is applicable to the most recent price data for a 10 EMA, whereas for a 20 EMA, only a 9.52% multiplier weighting is usable. There are also slight variations of the EMA arrival at by using the open, high, low or median price instead of using the closing price.
Traders need not burden themselves with the calculations for the EMA as software’s do that automatically. However is essential to know how the figures come about to help you in making correct judgments while trading. The most important aspect is for the user to know how to use the moving Average ribbons in the trading UI.
Using the EMA: Moving Average Ribbons
Moving averages enable traders to devise their trading strategies. To access moving average data, traders need to activate the moving average ribbon. The moving average ribbon plots a large number of moving averages onto a price chart. The chart appears as a complex display of many concurrent lines.
However, ribbons create an effective and simple way of visualizing the dynamic relationship between short, intermediate and long-term trends. Traders and price analysts rely on ribbons to identify turning points, continuations, overbought/oversold conditions. These conditions define areas of support and resistance and measure price trend strengths of the traded asset.
Users can further create a well defined three-dimensional shape that seems to flow and twist across a price chart.
Defined by their characteristic three-dimensional shape that seems to flow and twist across a price chart, moving average ribbons are very simple to create and interpret.
They generate buy and sell signals whenever the moving average lines all converge at one point. Traders get hints to buy on occasions when shorter-term moving averages cross above the longer term moving average from below. Sell orders can accomplish when shorter moving averages cross below from above.
More About EMA Indicator?
To build a moving average ribbon, a large number of moving averages of time period lengths plots on a price chart at the same time. some common parameters include eight or more moving averages. Intervals range from a two-day moving average to a 200 or 400-day moving average. For simplified analysis, traders should keep the type of moving average consistent across the ribbon for all EMAs
Whenever the ribbon folds, all of the moving average converge into one close point on the chart. At this point trend strength is likely weakening and pointing to a reversal. The opposite is true if the moving averages are fanning and moving apart from each other, suggesting that are ranging and that the trend is strong or strengthening.
On the other hand, downtrends indicate by shorter moving averages crossing below longer averages. Uptrends, conversely, show shorter moving averages crossing above longer moving averages. During these circumstances, the short-term moving averages act as leading indicators confirms as longer-term averages trend towards them.
The type or Numbers of moving averages vary significantly between traders. Majorly the variation is justified by the different investment strategies between traders and the underlying security or index. EMAs are popular because they give more weight to recent prices, lagging less than other averages. Some examples of common ribbons have eight separate EM lines, ranging in length from a few days to many months.
Experience shows us that trading on luck is not profitable both in the short run and the long run. It is therefore essential for traders to work hard at developing and proofing a good trading strategy.
Share your views regarding this topic in the comment sections below. Do not forget the follow the discussion on Twitter.