Here is a simple explanation about EMA (Exponential Moving Average):
What is EMA (Exponential Moving Average)?
EMA is a type of indicator of Moving Average, which gives more weight to recent (new) prices. This means, when calculating the EMA, today's and nearby day's prices are given more weight, while older day's prices are given less importance. Therefore, EMA reacts quickly to market changes.
Main function of EMA:
Quickly capturing trends:
EMA reacts more quickly to price changes than SMA.
Receiving buy/sell signals:
When a small EMA (like EMA(10)) crosses above a large EMA (like EMA(50)), it's a buy signal.
The opposite indicates a sell signal.
Why use EMA?
For those who engage in day trading or short-term trading, EMA is more effective.
When there is a sudden trend change or spike in the market, EMA helps to understand it quickly.
How does EMA look?
If the price rises above the EMA line, it is an uptrend; if it falls below, it is a downtrend.
EMA and SMA look almost the same, but EMA is more sensitive.
Practical tips:
Small period EMAs (9, 10, 20): To capture short-term trends.
Large period EMAs (50, 100, 200): To capture long-term trends.
Crossover strategy: Using two EMAs (like 20 EMA and 50 EMA) to catch trend reversals/entry points.
In summary:
EMA = gives more importance to new prices.
Helps to understand rapid trend changes and in making buy-sell decisions.
Very useful for day traders or short-term traders.