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The exponential moving average is widely use indicator by traders and investors, and is constantly being used to analyze the market trends, and to make trading decisions.
The exponential moving average (EMA) is the average price over a certain period of time. The formula uses weight number, also known as “smoothing factor” that determines how much weigh to give to the most recent data points.
For example, most traders use 9-day EMA or a 10-day EMA. The shorter the time period, the more weight is added on recent price movements. The longer the time period, the less weight on recent price movements.
In simple terms, the exponential moving average (EMA) job is to give more weight and importance on recent data points and less on older data points.
The exponential moving average (EMA) is calculated by using a math formula, which is:
EMA = (current data point times smoothing factor) + (previous EMA value times (1 subtract smoothing factor))
EMA formula
I know, do you have to do this in the stock charts??
Nope! Luckily most modern charting tools such as Webull, and TradingView already provide indicators that require a quick toggle.
The lines, and values will be drawn out for you automatically and updated regularly.
Overall the exponential moving average is a very useful tool for traders, but it is important to use other indicators with it, before making a trading decision.
Now in days, most modern chart trading tools provide the exponential moving average indicator. We like to use TradingView.
Enable the indicator and set the length to your preferred type. The most common values are 9, 10, 50.
Remember the further the number, the less weight on recent price movement.
You’ll want to see if the price of a stock is below or above the line that is drawn out in the chart. It will give you a great indicator if the stock is being bullish or bearish. Make sure to check different timeframes.
Based on what you see, you can go bullish or bearish.
Now, of course, the exponential moving average (EMA) is just one of many tools that traders use to analyze the trend of a stock. It’s important to consider combining it with other factors, and chart indicators to make a proper decision.
By the way: If you want to learn about how to use the EMA with the VWAP indicator, check out our completed guide to how to use EMA & VWAP for trading.
The exponential moving average isn’t for all types of traders, but it can work well for some.
The exponential moving average (EMA) is more responsive recent price movements, and is best suited for intra-day traders.
The exponential moving average is a great indicator tool for short-term to medium-term traders since gives more weight to recent price. But the exponential moving average indicator is best used with other indicators such as volume-weighted average price (VWAP) indicator.
The reason why the value changes based on timeframes is because the calculation of the exponential moving average takes into account the price from a given period of time–which all in all differ on different timeframes.
The biggest difference is the that the simple moving average takes into sum the closing price of a candlestick over a period of time. On the other hand, the exponential moving average (EMA) takes into account the most recent prices.