The Exponential Moving Average, EMA, is another moving average momentum indicator. The difference between an Exponential and a Simple moving average is the way that they are calculated. An EMA is often used in conjunction with other indicators to give a more rounded picture of trading entry and exit points.
What is an EMA?
An EMA is based on a particular time period so an EMA 5 is based on 5 periods whilst an EMA 30 is based on thirty periods. The larger the number of periods the less reactive the EMA is to recent price moves and as such the EMA is a momentum indicator as it moves based on price swings in the underlying.
How does the EMA Work?
The EMA is calculated by taking the number of periods required and summing the closing the price values at the close and multiplying them by a weighting factor. This weighting factor is higher for more recent periods than that of more distant periods. This gives more importance to the more recent price moves than an SMA does.
Often exponential moving averages are used in conjunction with each other and simple moveing averages to spot trend reversals and shifts in momentum. For example when a short term EMA is below a longer term one and then crosses it - you have indicated an upward shift in momentum that is a buy signal.
Example Chart EMA and Analysis
If you look at the Bitcoin price chart above you can see three cross overs marked by circles. The first orange cross over shows the SMA 13 and EMA 12 crossing the EMA 50 showing a change in trend upwards and therefore a signal to buy.
The second red cross over shows the EMA12 crossing the SMA 12 and indicating a sell.
The third indicator is a combination of all three indicators combining in a short timer period to indicate a sell.
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