The exponential moving average is a popular indicator. It is calculated in the same way as the Moving Average is calculated but with a weighing factor which is the exponential component. Thus, the result is data weighted by time, i.e. the recent data affect the indicator value more than the past data. It is the same kind of arithmetic mean formula but with a weight that becomes less and less when the data are older.
There is only one rule to use the EMA for trading and it is either the direction of the indicator, i.e. whether it is going up, or down, or the crossover of the price with the indicator.
All kinds of Moving Averages may have one pitfall actually that they take take into account stale data of the past, thus some care should be taken when dealing with Moving Averages that the arithmetic series is not too long in the past so as to add also unimportant data. Therefore, the n- day moving average needs to be short in sequence, rather than choosing the n value to be high. A lower n value should bring better results. It has been found that a value for n that is not to short, but also not too long may bring the best results and traders can say that a value of n around about 30 to 50 days, which makes the average good period to be about 42 days. Therefore, I will talk here for the 42-day EMA.
The 42 day EMA produces a large number of transactions compared with other indicators, but net profits are higher than other indicators, like the Simple Moving Average (MA). Therefore, it may have some advantage but because of the large number of transactions, profits per transaction was a bit low. Therefore, this may need to be traded for a longer term in order to make substantial profits, when compared with other indicators. For the short- term trader the EMA may not be very useful, while for someone who is trading stocks for the longer term, then the EMA will make sense to be used so that profits are taken from longer period.
There is only one rule to use the EMA for trading and it is either the direction of the indicator, i.e. whether it is going up, or down, or the crossover of the price with the indicator.
All kinds of Moving Averages may have one pitfall actually that they take take into account stale data of the past, thus some care should be taken when dealing with Moving Averages that the arithmetic series is not too long in the past so as to add also unimportant data. Therefore, the n- day moving average needs to be short in sequence, rather than choosing the n value to be high. A lower n value should bring better results. It has been found that a value for n that is not to short, but also not too long may bring the best results and traders can say that a value of n around about 30 to 50 days, which makes the average good period to be about 42 days. Therefore, I will talk here for the 42-day EMA.
The 42 day EMA produces a large number of transactions compared with other indicators, but net profits are higher than other indicators, like the Simple Moving Average (MA). Therefore, it may have some advantage but because of the large number of transactions, profits per transaction was a bit low. Therefore, this may need to be traded for a longer term in order to make substantial profits, when compared with other indicators. For the short- term trader the EMA may not be very useful, while for someone who is trading stocks for the longer term, then the EMA will make sense to be used so that profits are taken from longer period.
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