EMA (Exponential Moving Average) is a 'sensitive genius' in the family of moving averages; it is very sensitive to recent price changes and can quickly capture market pulses! Here, I will use formulas, characteristics, advantages and disadvantages, vivid metaphors, and practical examples to help you understand EMA in depth.

🟨Formula of EMA

🟩Why is EMA more sensitive to recent prices?

The magic of EMA comes from 'decreasing weights':

EMA is calculated through 'recursion', which means the weight of 'past data' gradually diminishes over time.

Every time EMA is calculated:


Yesterday's EMA×(1−α)

  • This part is yesterday's weight, and yesterday's weight also includes the weight of the day before, and so on.

  • The closer to the current price, the higher the weight; the further the price, the weight decreases exponentially as a power of (1−α).

For example:

Assuming α=0.2 (10-day EMA), then:

  • Today's price weight is 0.2

  • Yesterday's price weight is 0.2×(1−0.2)=0.16

  • The weight of the price from the day before yesterday is 0.2×(1−0.2)×(1−0.2)=0.128

  • The weight of earlier data will become smaller and almost negligible.

This allows EMA to more sensitively capture the latest price fluctuations, especially suitable for short-term trading!


🟧Characteristics of EMA

🟦Advantages and disadvantages of EMA

Advantages:

  1. Short-term sensitivity: reacts faster to the latest market changes, suitable for capturing trading opportunities.

  2. Trend following: can more timely confirm trend direction or trend reversal.

  3. High flexibility: suitable for analysis from short cycles (like 5 days) to long cycles (like 50 days).


Disadvantages:

  1. Easily disturbed by noise: in a volatile market, EMA may frequently issue false signals.

  2. Not suitable for long-term stable investment: compared to SMA, EMA is more easily 'dragged along' by short-term price fluctuations.

📌Summary of EMA

EMA is a good partner for short-term traders! Its 'quick response ability' allows you to capture market dynamics in a timely manner, but it is also susceptible to being disturbed by 'market noise'. In volatile markets, it can be used in conjunction with other indicators (like RSI or MACD) to avoid 'false signals'.