Exponential Moving Average Trading Strategies Explained
Exponential Moving Average or EMA is an advanced version of the simple average that puts greater weight on the most recent data points, while calculating the average for a particular day. By focusing more on the latest data points, the EMA ensures that the old and redundant data points do not have the same influence on the indicator as the latest data point. This is different from calculating the simple average, where all data points have the same weight.
The disadvantage of a simple average is that it might not give you a number weighted to heavily on old data. In many cases that’s not the most accurate figure. For example, if a company’s earnings result shows that it beat Street estimates, that may lead to a surge in price. A simple average indicator would not capture that momentume adequately. One would have to wait for a few days before it would actually reflect this information.
The EMA, on the other hand, would be more responsive to such changes by placing more weight to the latest developments in price. A trader can customize the weight the indicator needs to assign to the latest data point based on the importance they attach to the latest figure. It is this particular feature that makes EMA a more effective tool than the simple average.
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0:00 Music Intro
0:13 Intro
1:19 Disclaimer
1:35 What is an exponential moving average?
3:32 The formula
4:40 Simple vs exponential
6:47 12/26 strategy
9:44 5/8 strategy
11:04 Pros
12:38 Cons
13:30 Example and final thoughts