Exponential Moving Average
Exponential moving average or EMA, also known as Exponentially Weighted Moving Average, is one of the most widely used trend-following tools especially by swing traders and long-term traders. EMA is created to overcome the limitations of simple moving average; EMA is less simple and less lagging. Exponential moving average is also used to create other effective indicators like Percentage Price Oscillator (PPO) and Moving Average Convergence Divergence (MACD)
Exponential Moving Average, like the simple moving average, is the average of closing prices of a period. But unlike simple MA, it assigns more value (weight) to recent data and less value to older data; in other words EMA is more sensitive to recent price movements. The degree of weighting is defined as Alpha (a), whose value range from 0 to 1, and is defined as 2/(N+1), where N is the number of periods in the MA. Short-term traders use shorter periods (12 and 26 days are most common) and long-term traders use longer periods (50-days or 200-days).
For example, a new day’s EMA is calculated in a 12-day EMA by adding a weight of 0.1538 (2/13) to the new day’s closing price. This is closing price + (0.1538 x closing price). Although it is still in debate that whether EMA offer better results than simple MA, it is a valuable and simple tool for short-term traders who want to catch-up the current trend. More EMA can also be used in conjunction with other moving averages, and volume and price indicators to get better results.
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Exponential Moving Average, like the simple moving average, is the average of closing prices of a period. But unlike simple MA, it assigns more value (weight) to recent data and less value to older data; in other words EMA is more sensitive to recent price movements. The degree of weighting is defined as Alpha (a), whose value range from 0 to 1, and is defined as 2/(N+1), where N is the number of periods in the MA. Short-term traders use shorter periods (12 and 26 days are most common) and long-term traders use longer periods (50-days or 200-days).
For example, a new day’s EMA is calculated in a 12-day EMA by adding a weight of 0.1538 (2/13) to the new day’s closing price. This is closing price + (0.1538 x closing price). Although it is still in debate that whether EMA offer better results than simple MA, it is a valuable and simple tool for short-term traders who want to catch-up the current trend. More EMA can also be used in conjunction with other moving averages, and volume and price indicators to get better results.
NobleTrading.com Offers Online Stock Trading, Online Options Trading
Online Futures Trading, Online Forex Trading
Worldwide Brokerage Service, Day Trading Brokerage
posted by Daniel Pipitone at
5:58 AM
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