![]() The EMA indicator is a weighted moving average indicator and it gives more importance to recent price data, when compared to a simple moving average. ![]() It is a type of a moving average indicator, and one of the most popular trading indicators, used by thousands of traders. The exponential moving average indicator, also known as EMA, is a technical chart indicator that tracks the price movement of an instrument over time. In this article we will deal with the two most popular ones - exponential moving average and simple moving average. There are several types of moving averages, with each one having its own advantages and disadvantages. Moving averages are used for market states by smoothing out the price movement over a certain period of time. a set amount of periods configured by the user. Moving averages are a series of averages displayed on the chart, which are calculated using a specified subset of the data e.g. ![]() Raindrop Chart courtesy of of the most popular categories of indicators in trading are moving averages. If you are interested in seeing the backtesting data on moving average signals for both EMAs and SMAs you can check out my book here: 50 Moving Average Signals that Beat Buy and Hold. If you are trading crossover signals then the exponential moving average will probably give you more of an edge by getting you in and out faster than a simple moving average when you look at the backtests for most markets. What is the best moving average? If you are using long term moving averages like the 50, 100, or 200 day the simple moving average will likely give the most accurate level. I have found better backtesting results on EMA crossover signals overall than SMA cross over signals in my hundreds of hours of backtesting moving average systems on the stock market. An EMA can work better in faster markets that move more in shorter time frames as it is more adaptive to present price data and will get you in and out quicker than an SMA. The EMA calculations decreases the weighting of older price data and increases the weighting of newer price data based on how many days old the prices are. The EMA starts with the SMA data but adds a multiplier to the more recent price data points than the past ones. The exponential moving average is a faster moving average and gives more weight to recent prices than past prices and changes more quickly to adapt to the current market trend. Also the majority of traders tend to use the simple moving average for longer term moving averages like the 50 day and the 200 day simple moving average so you can see more responses of buyers and sellers around those key lines because they are more popular than the EMAs on those time frames. It tends to work better on slower markets like market indexes and big cap stocks as they tend to move less in percentage terms and more time can be taken to get in and out in most situations. The simple moving average is a slower signal to get you in and get you back out of a trade. On a 10 day simple moving average one day is weighted as one tenth of that moving average. It is slow to react to changes in price action as each data point is just one of the total sequence of data points. The simple moving average is just that, simply the moving average over the period of your chosen time frame. I get asked all the time the question: “What moving average is better the simple moving average or the exponential moving average?” The answer to this is that it depends on the market you are trading and what your backtests show on your specific markets.
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