Trading is an important part of any investor’s portfolio management. Everyone’s trading strategy is different, but there are some common approaches which prove to be effective over time. ‘EMA’ (Exponential Moving Average) is one such trading strategy and can be beneficial for novice traders wanting to increase their effectiveness. In this article, EMA is explored in detail, as well as comparing this to other relevant strategies for context.
What is EMA?
EMA stands for ‘Exponential Moving Average’ and is an indicator used to measure the average price of a security over a given period of time. It follows the proces of weighting recent prices more heavily in order to generate a more accurate representation of current market conditions. EMA puts more weight on recent prices as opposed to averages, which can lead to improved accuracy over time.
How to Use EMA
In order to utilise EMA effectively, a trader must first select a time period for the EMA. This is normally based on an overall trading strategy. After the time period is selected, the trader must calculate the EMA and the ‘shift’ parameter. The shift parameter allows traders to compare prices over two different EMA calculations to identify trends. When an investor has decided on their EMAs, they should monitor them to check for trends or moving averages.
Benefits of EMA
EMA is an effective tool to use in trading. The main advantage of EMA is that it can provide investors with a more accurate picture of the market over time. This allows traders to predict future price movements with greater accuracy, thereby reducing risk and increasing reward potential. Additionally, the EMA behaves more quickly to changes in the market, so traders can identify potential trading opportunities sooner.
Comparing EMA to Other Strategies
EMA is similar to the SMA (Simple Moving Average) in that it helps investors analyse trends in price movements. SMA calculates all available data for a given period of time as equal, whereas EMA puts more weight on recent data. This makes EMA more efficient in capturing trends. Another strategy, Bollinger Bands, may be used in conjunction with EMA to identify trends more clearly.
Conclusion
EMA is an effective trading strategy which is beneficial for novice traders wanting to improve their performance. By measuring the average price of a security over a given period of time, EMA provides investors with a more accurate view of the market and allows them to predict future price movements. Although similar to SMA and Bollinger Bands, EMA is more efficient in capturing trends making it ideal for predicting future price movements.
