What is the EMA? How to use EMA most effectively!What is EMA?
EMA or Exponential Moving Average (EMA) – An exponential moving average (EMA) is a type of moving average (MA) that is based on a weighted exponential formula that is more responsive to changes recent prices, compared to a simple moving average (SMA) that only applies equal weight to all periods, helping the EMA to smooth the price line more than the SMA.
What signals does the EMA provide to traders?
Moving averages offer a significant benefit by offering clear insight into price trends. In other words, the Exponential Moving Average (EMA) cannot exceed or remain above the price line unless the price is increasing. Similarly, it cannot be below the price line if the price is not actually decreasing. This is crucial for traders as it provides a distinct and reliable indication of the price trend, avoiding any ambiguity. The trend is essential in helping traders identify entry points.
The EMA will become a dynamic resistance, because it moves in the direction of the price, which means where the price goes, the EMA will follow.
Become dynamic support and resistance levels (these resistance levels can be used to compare the trendline, support and static resistance lines). From here will look for entry points, stop loss and take profit points.
Identify price trends.
Which EMA should be used most appropriately?
EMA 9 or EMA 10: This number represents a two-week period of trading, making EMA9/EMA10 commonly used for short-term transactions.
EMA 34/EMA 89 are used to align with the primary waves as per the Elliott wave theory.
EMA 20, EMA 50, EMA 200 are closely associated with trading sessions. Over the course of a year, we can typically trade for around 200 days, accounting for holidays and breaks. EMA50 represents the medium term, corresponding to the four seasons in a year, with each season having approximately 50 trading sessions. Similarly, EMA 20 represents the month.
Some traders also utilize the 250 EMA in addition to the 200 EMA, believing that 250 represents the number of trading days in a year.
EMA100 is a commonly chosen EMA due to its round number value. Round numbers are often seen as psychological barriers in trading.
Compare trendline with EMA:
As mentioned earlier, EMA is another way to identify trends, just like the trendline.
To better understand this concept, the trendline can be seen as a fixed resistance. Once you draw a trendline, it will act as a reference point for the price.
On the other hand, EMA is a dynamic resistance. It moves along with the price line. Unlike the trendline, EMA closely follows the price line because it is calculated based on the price itself. This makes EMA more accurate in showing the trend. It can clearly indicate whether the price is above or below the EMA.
Some notes with EMA:
- When the price surpasses or falls below the EMA, but then retreats below it again, it indicates a strong downtrend or uptrend.
- If the price strays too far from the EMA, it is advisable to wait for it to correct itself and return to the EMA before considering any trading actions.
- Fast EMAs or short period EMAs are more sensitive to price movements compared to slow EMAs, but they are also more prone to breakdowns. This can be advantageous as it allows for early trend identification compared to the SMA. However, the EMA is likely to experience more frequent short-term fluctuations compared to the corresponding SMA.
- EMAs act as dynamic resistance levels that consistently track the price line.
- The EMA is not primarily used for pinpointing exact tops or bottoms. Instead, it assists traders in aligning their trades with the prevailing trend.
- The EMA always has a delay, making the SMA more useful in sideways markets, while the EMA is more effective in clearly trending markets.
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