Tag: EMA

  • How To Use Moving Averages In Trading Stocks?

    How To Use Moving Averages In Trading Stocks?

    How To Use Moving Averages In Trading Stocks?
    Many traders tried to use the SMA to predict the sell or buy options on a chart. You can pull this off by using various averages for triggers.

    By Guy Avtalyon

    Moving averages are one of the most popular trading tools, so let’s see how to use moving averages in trading stocks. Some traders have great knowledge about it but some still make it wrong. The latter might have an extremely great influence on trading success and traders’ confidence in this strategy. But actually it’s a great strategy if you know how to use moving averages in trading stocks.

    Our aim is to show you exactly that and how to avoid mistakes. We’ll show you how to choose the type and length of the moving average. Also, we’ll show you how to use moving averages in trading stocks and how they can help you to make trading decisions.

    Which moving average to choose? 

    Not a small number of traders will ask what moving average to choose, EMA or SMA. To evoke. EMA is an exponential moving average while SMA is the simple moving average. There are not too many differences between these two but if you choose one or other that can make a difference in your trading result.

    The main difference between EMA and SMA is speed. Moving average EMA will always move much faster and thus will change the direction before than SMA. Hence, EMA is capable of faster recognizing the stock price change. On the other hand, SMA would take much more time to turn when the stock price changes.

    But you cannot conclude which is better based on their speed. How is that? EMA acts quickly when the stock price changes direction, which means it’s more sensitive. When something is sensitive it’s at the same time more vulnerable. That’s the reason why EMA could send a wrong trading signal. Simply, it reacts too soon.

    For example, if the stock price starts to go down, the EMA will begin turning down promptly and it will indicate a change in the direction too early. What if it is a short-term living change? What if it is a false signal? So, we’ll need to watch the SMA. It moves slower thus it provides a more accurate signal

    Well, it will be nice if so simple but it isn’t.  If you trade according to EMA only, you’ll be at risk to enter a trade too early. Also, if you use SMA only there is another problem because you might enter the trade too late. There is an additional benefit to using SMA. During the volatile markets, its signal is less wrong.

    How to trade with the SMA?

    SMA is a generally accepted technical indicator, as we said. Do you remember how we use it in school? It’s similar.
    By using SMA you’ll be able to recognize the strategy that will work for you. In the beginning, here is the formula and later we’ll show you how to use moving averages in trading stocks.

    The SMA formula is the average closing price of a stock over the given periods. So, add all closing prices on the particular stock during the week, for example, and divide the result by the number of days (a trading week is 5 days long). This may look like this for 5 days:

    (19 + 20 + 22 + 18 + 21) / 5 = 100 / 5 = 20

    You can calculate SMA for 10 days, 15 days, 50 days, etc. It’s simple math. Well. all indicators are based on math.

    With SMA, you cannot do whatever you want. It is important to use the most practiced SMAs, not some unnatural 33-days, for example. That cannot beat the market. Traders use 10, 15, 20, 50, 100, or 200 SMAs every day. And you have to know what is interesting for other traders, what they are looking for.
    The point is, the shorter the SMA, the more signals you will get. For instance, if you use 5-days SMA use it along with a longer SMA because you’ll need a proper trigger for your trade, not an indicators’ noise. Short-term traders will use SMAs for up to 20-days. 

    How to use moving averages

    The right question is how to make money with SMA. Find stocks that are breaking out or down but it has to be done strongly. Use SMAs, test them all, to recognize which setting carries the best price. Now, when this is done, let the price test a particular SMA, if done successfully you’ll have a confirmation of the trend. Enter the trade on the first following bar.

    Also, you can use two SMA to fade the primary trend. You’ll have to be positive that the stock price didn’t touch 5-days or 10-days SMAs in the latest 10 bars. The price should close below or above both SMAs but in the opposite direction of the primary trend in the same bar. Enter the trade on the first following bar.

    These are two approaches: with the trend or fade the trend when trading with SMA.

    How to use moving averages EMA?

    The EMA is maybe the oldest indicator of technical analysis. The EMA strategy is helpful to identify the prevailing trend in the stock market. When executing your trades, EMA will provide support and resistance level to do that. The exponential moving average strategy works in all markets and in any time frame, actually. It is a line on the price chart that uses a math formula to help you smooth out the price performance. The EMA formula pays more attention to the recent stock prices. As we said above, it’s faster.
    The EMA helps to reduce the noise of daily price action and shows the trend but also,  perfect in determining future changes in the market price.

    How to calculate the EMA?

    Use the SMA as the start-point for the EMA value. Let’s assume we want to observe 20-days. So, we’ll need to calculate the SMA for 20 days. On the first next day, the 21st day, we have to use SMA from the prior day as the first EMA.

    The calculation for the SMA is simple since it is the sum of the closing prices during a chosen period, and divided by the number of results obtained for that period. For instance, a 20-day SMA is the sum of the 20 closing prices for the last 20 days and divided by 20. Further, you must calculate the multiplier for weighting the EMA. Here is the formula

    (2 / (number of results + 1)). 

    In the example of the 20-day average, it looks like this:

    2/(20+1) = 2/21 = 0,0952

    Let’s calculate the current EMA.

    EMA = closing price x multiplier + EMA (prior day) x (1-multiplier)

    The EMA puts a higher weight to recent prices, while the SMA gives equal weight to all values. The weighting is higher for a short-period EMA than for a long-period EMA. 

    EMA strategy

    Use one moving average with a long period and one with a short period to remove subjectivity from the trading.

    Draw on your chart 20 and 50 EMAs. Do it precisely to be able to identify crossover when it occurs and wait for the price to trade above 20 and 50 EMA. The area between 20 and 50 EMA should be retested twice or more times. If two tests are successful and successive that means the market has sufficient time to develop a trend.

    We hope you can now understand how to use moving averages in trading stocks. They are fundamental for strategies based on technical analysis. If you use moving averages in combination, you’ll be able to predict both short-term and long-term stock price movements.
    How to use moving averages in trading stock more? Use them to define levels of support and resistance.
    Stay tuned, that will be the next topic.

  • What Is EMA in Stock Trading?

    What Is EMA in Stock Trading?

    5 min read

    EMA in stock trading

    by Gorica Gligorijevic

    EMA in stock trading is a tool for tracking the progress of stock prices. Term EMA is actually the exponential moving average.

    Moving average should be one of the crucial parts of your education as a stock trader. But EMA differs from simple MA.

    EMA is created from an easy mathematical equation. Nevertheless, it is one of the most valuable and relevant chart indicators. By using EMA in stock trading you can easily recognize buy and sell signals and build an individual technical stocks trading method.

    EMA is related to historical data of closing prices. The information given by EMA is extremely helpful because those data provide you to determine trends and find future price action. EMA is a data point.

    Since EMA is moving average, let us evaluating Moving Averages.

    It is easy to find a simple moving average or SMA. All you have to do is to sum all closing prices in some period, for example, 10-days. That number now, divide by 10. The result is SMA.

    Also, you can use the chart and add changes in every single trade every day. After, in our case 10 days,  will show you the trend in the average closing price. The SMA line trending upward shows stock is rallying, and vice versa, the SMA line trending downward, shows a stock falling in prices.

    Exactly, the EMA shows the current price trend. 

    EMA in stock trading

     

    The longer the period covered by the EMA, the lower the relative weighting for recent trading.

    EMA chart lines such as 10-days can be used to simply see stock price trends. The slope of the EMA line will show you if the stock is in an up or downtrend. One interesting image may appear in the chart, it is the cross. When the price hits an EMA line and passes it, you can recognize the cross. That is the sign of a reversal trend.

     EMA line for a short period as in our example is, can tell when the trend is changing. The other EMA lines for 50-days or 200-days periods shows resistance and support levels for the stock price.

    How to use EMA for trading strategy?

    By drawing EMA and SMA on the chart, you can detect a potential shift in a stock price. If you notice the EMA line crosses over SMA line you can be sure the price is reversing from the current trend. Moreover, SMA will show you the support level and resistance level.

    To remind you, the support level is the point when the price is falling, and the resistance level is the point where the price starts to rise.

    The best moment to enter the trade is just when the price breaks the trend line or bounces against it and reverses. These points are made by crossing the EMA line and that is the reason why EMA is called a data point.

    How to calculate the EMA

    First, measure the SMA over an appropriate time period. It is the total of the stock’s closing price divided by the same number of periods. For example, a 10-day SMA is simply the amount of the closing prices for the last 10 trading days, divided by 10.

    The formula is 

    SMA = (N−period sum) / N

    N is the number of days in a specified period

    the sum represents the sum of stock closing prices in the observed period

    Further is somehow more complicated but not impossible :).

    Calculate the multiplier for weighting the EMA. 

    The weighted multiplier is calculated as 

    2÷(selected time period+1)

    2÷(10+1) = 0.1818 which is 18.18% in percentages.

    [2 ÷ (selected time period + 1)]

    or

    [2/(10+1)]= 0.1818

    And the last step. To calculate the EMA, use this formula

     [Closing price-EMA (prior day)] x multiplier + EMA (prior day)

    Let’s calculate the EMA in stock trading:

    EMA=Price(t)×k+EMA(y)×(1−k)

    The legend:

    t – today

    y – yesterday

    N – number of days in EMA

    k – 2÷(N+1)

    Bottom line

    Due to different trading strategies, underlying security, and traders affinities, you can find different types of moving averages. But one thing is sure, EMA is extremely popular because it gives more power to current prices, and has more advantages than other averages.

    EMA relies entirely on historical data. Some economists think that market prices carry all information. According to them, we don’t need EMA because the historical data will tell us nothing about the price movements in the future.  Also, there is the question of where to put more attention. On the current data or past data. Some traders think that fresh data quite good match the current trends.

    But one thing is sure: EMA is popular. If it cannot provide a good result, why traders would use it.

    • Chart source: TradingView
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