What is an Exponential Moving Average(EMA)?
An exponential moving average (EMA) is a type of moving average that places a greater weight and significance on the most recent data points.
An exponentially weighted moving average reacts more significantly to recent price changes than a simple moving average, which applies an equal weight to all observations in the period.
The Exponential Moving Average is a trend indicator. Much like the simple MA, the EMA can be used to see trends over time. Inspecting several EMAs simultaneously is fairly easy with moving average ribbons.
How To Calculate EMA — Formula
The exponential moving average (EMA) smoothes data exponentially over time. To calculate the EMA, we need to use the following formula:
movav = prev * (1.0 – smoothfactor) + newdata * smoothfactor
where smoothfactor =1- 2 / (1 + period)
Simplifying things, we can also use the following formula to calculate the EMA:
EMA = K * (Current Price – Previous EMA) + Previous EMA
where k is the weighing factor for the EMA.
k=2/(n+1), where n is the time period
Why use EMA?
The EMA trading strategy is a reliable trading strategy and reliable for professional traders. Some of the reasons why EMA trading strategy is preferred are:
- EMA is faster than many strategies when it comes to reflecting rapid fluctuations in the price points
- EMA is useful for shorter time periods and fast-moving markets
- The Exponential Moving Average also acts as resistance and support bands for the prices of a financial instrument
How to use EMA Strategy:
The Exponential Moving Average is a moving average that places a greater weight and significance on the most recent data points. Like all moving averages, this technical indicator is used to produce buy and sell signals based on crossovers and divergences from the historical average. Traders often use several different EMA lengths, such as 10-day, 50-day, and 200-day moving averages.
EMAs are commonly used in conjunction with other indicators to confirm significant market moves and to gauge their validity. For traders who trade intraday and fast-moving markets, the EMA is more applicable
- When the price crosses above the exponential moving average, it indicates that the current price is greater than the average of the defined period, hence the market is in an upward trend.
- When the shorter period moving average crosses over the longer time moving average, it indicates the start of a new uptrend.
- When the price crosses down the exponential moving average, it indicates that the current price is lower than the average of the defined period, hence the market is in a downward trend.
- When the shorter period moving average crosses down the longer time moving average, it indicates the start of a new downtrend.
Building EMA Strategy on Mudrex
You can create the exponential moving average strategy and many other strategies on Mudrex using simple ‘blocks’. You can connect multiple blocks and define conditions on those connections or ‘paths’ to create your strategy on Mudrex.
As discussed above, lets first write our entry/exit conditions so that we know what to do:
BUY: When price crosses up the EMA.
SELL: When price crosses down the EMA.
Final Strategy: The final strategy on Mudrex looks like this
We can now run a quick back-test to see how our strategy performs.