On the contrary, during a bearish move EMA curve acts as a strong resistance level. In a bullish market, the EMA curve acts as a strong support level. Moving average curve acts as a strong support and resistance level, that is more often than not respected by the markets. Applications of EMA Strong support and resistance zones Usually, when the price surpasses its 100 or 200-day moving average, it’s a signal of a trend reversal. In comparison, 100 and 200-day exponential moving averages confirm long-term trends and are of greater significance while tapping reversals. 10, 20, and 50-day exponential moving averages are usually preferred for short-term trends and subsequent trading. Nevertheless, you can use EMA to trade in the direction of the trend.ĮMA of different values can be used for different styles of trading. The simple reason is that EMA is a lagging indicator, so there will always be a delay. One needs to understand that EMA or even SMA may not help to capture the exact bottom and top of the market. Traders are highly active when the price is near the EMA curve. Traders more often than not look to take positions in the direction of EMA, and for the same, the EMA curve becomes crucial.
As traders, one needs to look for signs where the curve is losing its strength or flattening because that can be used to mark entry and exit points. When the market is trending, the EMA also follows the trend, i.e., in a bullish market, the EMA curve will also move upwards and vice-versa. But, the very same also makes it very volatile. Since it is susceptible to price movements, it can identify trends earlier than SMA. Naturally, the most recent data will be assigned higher weights. The exponential smoothing constant here applies proportional weights to data points depending upon their newness. P = Previous periods EMA (we take SMA for the first-period calculation) It’s the simple average of the previous 100-day’s data points. So, for instance, if we want to calculate the 100-day EMA of any security, we first need to calculate its 100-day SMA. Calculating EMAįor calculating EMA, SMA is needed as the base. 20, 50, 100, and 200 are some commonly used EMA. It only estimates the continuation or reversal of the price trend based on the recent data points captured.ĮMA can be of varied types depending upon the number of price points taken into consideration. Note that the exponential moving average is nonetheless a lag indicator, i.e, it doesn’t predict future price trends. This is done by assigning them more weights, therefore making EMA sensitive to price changes. However, EMA follows the price movements more closely and lays emphasis on the most recent data points. It runs along the same lines as the Simple Moving Average of measuring the direction of the trend over a period of time. Used as the base for several technical indicatorsĮMA stands for exponential moving average.
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