One can learn many tactics and strategies in stock trading. But one of the first steps you have to learn about is moving averages.
In this article, we’ll explain exponential moving average (EMA) and why it’s important in the stock world, as well as stock trading strategies to incorporate if you’re new to the stock market and trading.
EMA is used to identify the top trend in the market. An ema indicator takes the most recent data into account. It weighs recent data and price changes more heavily in the market compared to a simple moving average (SMA).
According to BusinessDictionary, “An EMA differs from a simple moving average in that it attaches more significance to recent data, making it more sensitive to early indications of a change to the current trend.”
Traders use different EMA information such as 20-day, 30-day, and 90-day moving averages. This means traders look at trends and where the average price is at during a certain amount of time in 20-day increments, 30-day increments, etc. The closer to the present day, the more accurate the trend and EMA indicator, because it takes the most recent data into account.
As Yahoo Finance says, the difference between EMA and SMA is noticeable when comparing long-term averages. EMA focuses on short-term scales and SMA on longer-term scales.
“The 200-day EMA is quicker to react to the most recent price changes in indexes such as the S&P 500, which is not surprising because the exponential moving average has a smaller lag time, or more responsive, compared to the simple moving average,” Yahoo Finance says.
Yahoo also says that SMA “is a true indicator for the average prices over a specific time period.”
While EMA is a common average to monitor, it all comes down to preference. The stock market might be something traders can closely monitor and make educated guesses about, but no one truly knows what’s going to happen at any given time.
Calculating the EMA
Now that you have a better idea of what an EMA is, it’s important to know the actual formula to calculate it.
The Balance details this formula:
Exponential moving average = [Close – previous EMA] * (2 / n+1) + previous EMA
“For example. a four-period EMA with prices of 1.5554, 1.5555, 1.5558, and 1.5560, with the last value being the most recent, gives a current EMA value of 1.5558 using the calculation [(1.5560 – 1.5558) x (2/5) + 1.5558 = 1.55588]”
Strategies to incorporate
You need many different strategies and tips to follow in investing, and although not everyone follows the same rules, U.S. News has seven great strategies to follow:
- Alter your strategy in an uncertain market
- Avoid emotional decision-making
- Invest in tangible assets
- Buy a home
- Play it safe
- Don’t sell at market bottoms
- Consider alternative active investment strategies
In terms of investing in stocks (and not just investing as a whole), NerdWallet recommends that you… “check your emotions at the door; pick companies, not stocks; plan ahead for panicky times; build up your stock positions with a minimum of risk; and avoid trading overactivity.”
Future, novice, and expert traders alike should do constant research when it comes to the stock market and trading tactics. Constant research and tweaking strategies are key in any industry.
Nonetheless, we hope you have a better understanding of what EMA means in the stock world as well as strategies to incorporate in investing.