How I Made $4000 Monthly With The Exponential Moving Averages

How I Made $4000 Monthly With The Exponential Moving Averages

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The exponential moving average (EMA) is a technical chart indicator that tracks the price of an investment (like a stock or commodity) over time. The EMA is a type of weighted moving average (WMA) that gives more weighting or importance to recent price data. Like the simple moving average (SMA), the EMA is used to see price trends over time, and watching several EMAs at the same time is easy to do with moving average ribbons.

Calculating SMA and EMA

The EMA is designed to improve on the idea of an SMA by giving more weight to the most recent price data, which is considered to be more relevant than older data. Since new data carries greater weight, the EMA responds more quickly to price changes than the SMA does.

  • Exponential moving averages (EMAs) are designed to see price trends over specific time frames, such as 50 or 200 days.
  • Compared to simple moving averages, EMAs give greater weight to recent (more relevant) data.
  • Computing the EMA involves applying a multiplier to the simple moving average (SMA).
  • Moving average ribbons allow traders to see multiple EMAs at the same time.

The formula for calculating the EMA is a matter of using a multiplier and starting with the SMA. There are three steps in the calculation (although chart applications do the math for you):

  1. Compute the SMA
  2. Calculate the multiplier for weighting the EMA
  3. Calculate the current EMA

The calculation for the SMA is the same as computing an average or mean. That is, the SMA for any given number of time periods is simply the sum of closing prices for that number of time periods, divided by that same number. So, for example, a 10-day SMA is just the sum of the closing prices for the past 10 days, divided by 10.

  • Use the same rules that apply to SMA when interpreting EMA. Keep in mind that EMA is generally more sensitive to price movement. This can be a double-edged sword. On one side, it can help you identify trends earlier than an SMA would. On the flip side, the EMA will probably experience more short-term changes than a corresponding SMA.
  • Use the EMA to determine trend direction, and trade in that direction. When the EMA rises, you may want to consider buying when prices dip near or just below the EMA. When the EMA falls, you may consider selling when prices rally towards or just above the EMA.
  • Moving averages can also indicate support and resistance areas. A rising EMA tends to support the price action, while a falling EMA tends to provide resistance to price action. This reinforces the strategy of buying when the price is near the rising EMA and selling when the price is near the falling EMA.
  • All moving averages, including the EMA, are not designed to identify a trade at the exact bottom and top. Moving averages may help you trade in the general direction of a trend, but with a delay at the entry and exit points. The EMA has a shorter delay than the SMA with the same period.

You should notice how the EMA uses the previous value of the EMA in its calculation. This means the EMA includes all the price data within its current value. The newest price data has the most impact on the Moving Average and the oldest prices data has only a minimal impact.

EMA = (K x (C – P)) + P

Where: C = Current Price P = Previous periods EMA (A SMA is used for the first periods calculations) K = Exponential smoothing constant

The smoothing constant K, applies appropriate weight to the most recent price. It uses the number of periods specified in the moving average.

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