The exponential moving average formula tells you the trend of a stock. 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. EMAs are a great tool when you’re intraday trading, swing trading, or investing.
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(EMA) Exponential Moving Average Formula Explained
Exponential moving average (EMA) lines are great on the 1 minute and 5 minute chart for day trading, but can also be useful when swing trading. The 9 and 20 EMA’s are a great combination to help give trading signals for entries and exits. The 13 EMA can also be used; it can be used in conjunction with the 9 and 20.
If the 9 ema 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. Pay attention to ema crossovers, which signify potential reversal setups.
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.
Basics
They also are great for finding price reversals and whether the stock is going to be bullish or bearish. The slant of the EMAs shows if a stock is in an upward trend or a downward trend. Knowing the trend of the stock is going to help determine if it is time to enter or exit a trade.
Never want to buy when the stock is in indecision mode because it can go either way. Always look for confirmation of the trade.
Day Trading
The exponential moving average formula is one of the best indicators for day trading. When day trading and see the price is moving quickly, watch how it interacts with the 9 EMA can help gage when to get in and out with a profit.
When in our trade room members often hear someone saying “to watch the 9 EMA.” Ideally entering a trade 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 may want to consider an exit strategy. This is where the saying “ride the 9” comes from.
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. VWAP is very complimentary to EMAs and a useful indicator.
Candlesticks
EMAs will push the price up or down; watching them will tell whether it is time to enter or if it is not time yet and should wait. As long as the candlesticks are above the 9 and pushing up; try to stay in and follow your game plan. Sometimes the best trade is no trade at all. Always wait for a set up that confirms the game plan.
If the candlesticks are breaking below the 9; keep an eye on what the 20ema decides to do. If it begins to cross and candle sticks are below it, might be a sign to exit out or possibly short the stock and ride the push down.
Swing Trading
The exponential moving average formula is great for day trading, but also can be useful when swing trading. When swing trading it usually means holding a stock for 3-5 days. Using the EMA trading strategy on the daily chart can help determine whether to take the trade for that time period.
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 can be the best choice.
If the EMAs are moving in a direction that shows a crossover is coming, waiting to get in might be smart. Sometimes they pinch but do not cross, and then go back up. This could result in a loss if shorting or trading Puts.
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, wait till the set up provides a good signal to enter.
Analysis
The exponential moving average formula is a great technical indicator. Trading can be emotional when especially when seeing the profit moving up and/or down. These tools and following technical analysis gives the trader a better 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, it is gambling.
