In this post we’re going to learn about the exponential moving average formula. Investopedia defines exponential moving average (EMA) as a type of moving average that is similar to a simple moving average, except that more weight is given to the latest data.
The EMAs react quicker to the recent changes in price than an SMA (simple moving average) would. EMAs are a great tool when you’re intraday trading, swing trading, or investing.
These indicators are added to your chart to use as information on trends and support and resistance. The EMAs are used in conjunction with other types of technical analysis to give you a better picture of what a stock as the potential to do. Isn’t that what everyone really wants to know!?
EXPONENTIAL MOVING AVERAGE FORMULA
The exponential moving average formula tells you the trend of a stock. EMAs are great on the 1 minute and 5 minute chart for day trading, but really any time frame chart you are planning on trading. The 9 and 20 EMAs are a great combination to help give you trading signals for your entries and exits.
They also are great for finding price reversals and whether the stock is going to be bullish or bearish. The slant of the EMAs show you if a stock is in an upward trend or a downward trend. Knowing the trend of the stock is going to help you determine if you want to enter or exit a trade.
There are three things the exponential moving average formula tells us. When the 9 is over the 20 the price is bullish. If the 20 is over the 9 the price is bearish.
When the 9 and 20 are close together and it’s difficult to differentiate the two then the stock is indecisive. You never want to buy when the stock is in indecision mode because it can go either way. Always look for confirmation of the trade.
Trading doesn’t have to be complicated. The chart above shows a simple bullish and bearish signal. If you’d like to join our community and gain access to our members only videos on exactly how we trade EMA’s, candlesticks and trend lines you can join our community.
EXPONENTIAL MOVING AVERAGE FORMULA – DAY TRADING
The 9 EMA is one of the best indicators for day trading. When you’re day trading and price is moving quickly, watching how it interacts with the 9 EMA can help you to get in and out with a profit. Using the 1 minute chart with the 9 EMA is pretty much a day trading staple.
If you’re in our trade room you’ll always hear someone telling you to watch the 9 EMA. You want to enter a stock when price is as close to the 9 EMA as possible, because risk is low the closer you buy to the 9 EMA. Then you ride it up. If it breaks below the 9 EMA then you want to consider your exit strategy.
The 5 minute can help with finding an exit as well. If price is going between the 9 and 20 on the 1 minute but staying above the 9 on the 5 minute, it’s still in a bullish trend. We always day trade with 1 minute and 5 minute charts open.
If you’d like my custom day trade indicator setup for ThinkOrSwim – join our subscription and find it on the members only page! I would also like to mention that we trade with VWAP on our charts. VWAP is very complimentary to EMAs and a useful indicator.
Watch our YouTube video below on EMA lines for a visual interpretation:
EXPONENTIAL MOVING AVERAGE FORMULA – PUSH UP OR DOWN
EMAs will push the price up or down and watching them will tell you what move to make, or if you should wait. As long as the candlesticks are above the 9 and pushing up you’re staying in.
If the candlesticks are breaking below the 9 watch what the 20 EMA decides to do. If it begins to cross and candle sticks are below it, you need to be out or shorting the stock and riding the push down.
This takes some practice so make sure you are paper trading first before trading with real money! Take our stock market courses to learn more about reading charts.
EXPONENTIAL MOVING AVERAGE FORMULA- SWING TRADING
The exponential moving average formula is great for day trading but you can use it for swing trading also. When we are swing trading we’re usually holding a stock for 3-5 days. So using the EMA trading strategy on the daily chart helps to determine whether to buy a stock for that time period, or a call or put option.
The EMA crossovers play an important role in this along with the RSI and MACD. If the EMAs are far away from each other on the daily and the RSI is showing a stock is oversold then being extra vigilant as to what the EMAs are doing.
Also make sure you know your candlesticks! You can learn about candlesticks and more from our books recommended in our stock market books post.
If you see the EMAs moving in a direction that shows a crossover is coming, waiting to get in might be smart. Sometimes they pinch but don’t cross and then go back up and if you bought a put, that could be a loss.
Using the same EMA trading strategy as day trading to get in and out of a stock is good for swing trading too. Get into the trade when price is as close to the 9 EMA as possible. If the trading action is choppy, just wait it out till you get a good signal to enter.
EXPONENTIAL MOVING AVERAGE FORMULA- TECHNICAL ANALYSIS
The exponential moving average formula is a great technical indicator. Trading can be emotional when you’re seeing the profit in your accounts moving up and down and following technical analysis gives you the best chance to be successful.
Technical analysis keeps things in perspective and the EMAs are a great way to see the trends quickly, and make trading decisions. Trading without EMA’s or technical analysis is not trading, its gambling. We don’t like that in our community!
Everyone starts somewhere,and trading can seem very complicated and confusing. Especially with all of the information that is out there. We’ve made it really simple and safe for you to learn in our community.
We do not want people gambling when it comes to trading! As they say, you need to learn, then you can earn. There are If you’d like to learn more about technical analysis take our swing trading course.
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