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Exponential Moving Average (EMA)

 

Honestly, EMA’s provide little difference from their cousin, the SMA. The real difference is in the calculation of the values used to form the line graph itself.

 

By definition, an exponential moving average has more weight given to recent prices over past prices. A simple moving average takes the prices of a number of periods and divides by that number of periods. The EMA calculation places more importance on more recent data, for example; 20% weight to most recent day, 15% weight to the day before, and so on. (this is an example and is not meant to provide the true mathematical constraints for constructing the EMA)

 

Regardless…

 

The math used to depict the line doesn’t affect short term traders in the way it could long term investors. The differences between the SMA and the EMA for our purposes may not even amount to pennies. So I don’t give it much thought.

 

I use it solely to account for the differences in the mathematical construction of the EMA vs the SMA. And to be honest I could just as easily apply a slower SMA in its place.

 

Of the ten indicators listed this one is likely the most irrelevant so I’ll just say this, I do use it and it does provide value, in that, I’m able to stay on the right side of the trend.

 

How?

 

When the shorter(faster) period SMA crosses above the longer(slower) period EMA the market is in an uptrend. When the faster SMA crosses below the slower EMA the market is in a downtrend.

 

But beware of choppy sideways moving markets… the moving averages, exponential or simple, tell us very little when the market isn’t trending.

 

Well, that’s it…

 

Have a question… you know where to ask!

 

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