The Exponential Moving Average (EMA) is a moving average that places emphasis on recent price movements. While a simple moving average assigns equal weight to all data points, an EMA assigns exponentially decreasing weighting to older pricing. The EMA Indicator is often used by traders to identify trends in the market and determine support and resistance levels.
When the underlying price is above the EMA line, it may be considered an upward trend. On the other hand, when the underlying price is below the EMA line, it may be considered a downtrend. Traders also use the EMA to identify potential buy and sell signals. For example, when a shorter-term EMA line crosses above a longer-term EMA line, it may be considered a buy signal, while when a shorter-term EMA line crosses below a longer-term EMA line, it may be considered a sell signal.
The following parameters can be adjusted based on the individual trader's preferences and risk tolerance:
Price: The EMA can be calculated using different types of price data, such as closing price, open price, high price, or low price. The most commonly used price is the closing price, but traders can choose to use other types of price data if they believe it provides a better representation of the security's performance.
Length: The number of data points that the EMA is calculated over.
Displace: The number of periods by which the EMA is shifted forward or backward in time.
EMA Indicator on chart
*For illustrative purposes only. Not a recommendation of a specific security or investment strategy.