Introduction

What is an Exponential Moving Average (EMA) in trading?

• I covered the Simple Moving Average (SMA) in my previous article which calculates the average of the data points equally. Exponential Moving Average (EMA) is similar except it places a greater weight and significance on the most recent data points.
• EMA is used more by short term traders as it is quicker to react to price changes compared to the SMA which reacts slower.
• By comparing two EMAs one can determine if the price is on the increase or decrease, known as a bull or bear trend. Common EMA’s used in trading are EMA12 and EMA26.
• Buy Signal: EMA12 > EMA26, Sell Signal: EMA12 < EMA26

How do we calculate a simple moving average?

The formula for EMA is:

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