Using the EMA
An Exponential Moving Average (EMA) is an indicator that places greater weighting to the most recent price data. This indicator places great significance to the most recent behaviour of traders. When using an EMA, you are not limited to one specific instrument, it is available in a variety of trading instruments.
The most common choice for a smoothing factor when using the EMA is 2, this ensures that the most recent observation carries more weight. After calculating the SMA and the multiplier for smoothing the EMA, the below formula will then calculate the EMA
Common lengths for the EMA include 21-, 50-, 100 and 200-
EMA = Closing Price x Multiplier + EMA (Previous Day) x (1-Multiplier)
An EMA will help with gauging momentum and further assist with confirming trends. When used with other indicators, EMA’s confirm significant market moves and gauge their validity.
The exponential moving average can be a dynamic support and resistance. When price finds support and rejects it there is a potential for long positions. Likewise, when price finds resistance against it there is a potential for short positions.
In the image above, you can see an example of taking short positions once price is rejected the 100 EMA as a resistance.