- July 22, 2022
- Posted by: CoachShane
- Category: Trading Article
An exponential moving average (EMA) is a type of moving average that places more weight on recent prices to create a smoother, more responsive average. This makes it a popular tool among traders who are looking for trends and trying to identify potential reversals.
However, because EMAs place more weight on recent prices, they can also be more volatile than other types of moving averages giving traders false signals. This means that choosing the right EMA length is important for ensuring that you get an accurate picture of the market.
What Is An Exponential Moving Average?
As mentioned, the EMA is a moving average that gives more weight to recent data. The weighting is based on a mathematical calculation, so the EMA responds more quickly to recent changes in the data.
Calculation: EMA = Closing price x multiplier + EMA (previous day) x (1-multiplier)
When the data is trending upwards, the EMA will also trend upwards. When the data is trending downwards, the EMA will also trend downwards. The EMA can be used as a tool to smooth out data or to identify trends.
How Is An EMA Different From Other Moving Averages?
There are a number of different moving averages used by technical analysts, and each has its own advantages and disadvantages. The most common type of moving average is the simple moving average (SMA), which simply takes the average price over a specified period of time. However, the SMA is often criticized for being slow to react to changes in price because it treats all data equally.
The exponential moving average (EMA) addresses this issue by giving recent data more important. As a result, the EMA is considered a more accurate reflection of current market conditions. Another advantage of the EMA is that it can be used to generate buy and sell signals in conjunction with other technical indicators. For example, many traders use the EMA crossover as a signal to enter or exit a position along with an oversold/overbought indicator.
While the EMA does have some advantages over other types of moving averages, it is important to remember that no indicator is perfect. As with all technical analysis tools, it is important to use the EMA in conjunction with other forms of analysis before making any trading decisions.
How Do You Choose The Best EMA Length For Your Trading?
When it comes to settings there is no “right” answer. The best length will depend on your trading goals, time period of your chart, and trading style. For example, shorter settings are better for identifying short-term trends, while longer period settings are better for identifying long-term trends.
Some traders use multiple moving averages of different lengths on the same price chart to give them a more complete picture of the market.
The key is to experiment and find what works best for you. One way to do this is to look at historical data and see how different EMA lengths would have performed in different market conditions. Another way is to test different EMA lengths in a demo account and see how they affect your profitability over a basket of trades.
Whichever method you choose, the important thing is to take the time to find an EMA length that fits your trading style and to be consistent.
Periods To Consider
When it comes to the period and the length, there are generally 3 different period settings you should think about using:
10 period: Popular in stocks and extremely fast-moving. Often used as a read on momentum
21 period: Medium-term and switched with 20 period. Good when it comes to riding intermediate trends
50 period: Long-term moving average and suited for identifying the longer-term direction
Don’t get too bogged down in the exact setting. An 18 or 22 moving average is not much different than using a 20 period.
8 EMA + 21 EMA Popular Setting
The 8 EMA and 21 EMA are two of the most popular moving averages used by traders. The 8 EMA is a shorter-term moving average, while the 21 EMA is a longer-term moving average. These two moving averages can be used together to help identify trends and generate buy and sell signals.
Crossovers
One popular trading strategy that uses the 8 EMA and 21 EMA is the moving average crossover. This strategy is based on the idea that when the two moving averages cross, it signals a change in trend. For example, if the 8 EMA crosses above the 21 EMA, it could be a sign that the market is about to trend upwards. Conversely, if the 8 EMA crosses below the 21 EMA, it could be a sign that the market is about to trend downwards.
The moving average crossover is a popular strategy because it can be used in conjunction with other technical indicators to confirm trends and reversals. For example, many traders will use the moving average crossover in conjunction with support and resistance levels. If the moving average crossover occurs at a support or resistance level, it can be a strong signal that a trend reversal is about to occur.
Some traders will enter a position when the two moving averages cross and exit when they cross back again. Others will use the moving average crossover as a signal to enter a position, but they will exit when another technical indicator gives a signal to do so.
My personal choice would be to use the crossover for trend direction and a pullback to the moving averages as a trade setup.
This technique is made more powerful if looking for the pullback to come into an area of support or resistance.
The important thing is to find a method that works for you and that you are comfortable with.
What Are Some Things To Keep In Mind When Using EMAs?
When using EMAs, there are a few things to keep in mind:
First, EMAs are not always accurate, and they should be used in conjunction with other technical indicators or price action.
Second, EMAs are trend-following indicators, which means that they will lag the market. As a result, it is important to use them in combination with other indicators that can help you confirm the direction of the trend. Again, price action would be my top choice to use with a moving average.
Third, all moving averages will give mixed trading signals during a trading range. Learning the different in price structure for a trading range and trending market is important.
On this chart, you can see support and resistance areas as well as a mixed trending structure pattern. You’d want to wait until price breaks from the range before looking for a trade entry.
Finally, EMAs of different lengths will produce different results, so it is important to experiment with different settings to see what works best for you.
By keeping these things in mind, you can use EMAs to give you a potential edge in your trading approach.
Indicator Conclusion
There is no perfect length for a moving average, and the best length will depend on your trading goals and style. Day trading will want to consider using shorter averages, while swing trading and investing will want to use longer averages. The key is to experiment with different lengths and find what works best for you.
Remember to use moving averages in conjunction with other technical indicators including price action to confirm trends and generate accurate signals.
