Exponential Moving Average (EMA)
Exponential moving average is another type of moving average, which gives greater weight to more recent data as opposed to the simple moving average. It responds to changes faster than a simple MA. EMA is calculated by multiplying a greater percentage to the latest data, as opposed to giving the same weight for both. Here is the formula to calculate exponential moving average:
EMA = Ptoday* K + Emayesterday * (1-K), where
– K = 2/(N+1)
– N = the number of days in the EMA
– Ptoday = today’s closing price
– Emayesterday = yesterday’s Ema
Trading Signal:
– A buy signal is triggered when closing prices cross above the EMA.
– A sell signal is triggered when closing prices cross below the EMA.
Example:
Let’s look at the stock charts of Apple and Citigroup as examples. A buy signal is generated when prices cross above the 9 day EMA, as circled below. A sell signal is generated when prices cross below the 9 day EMA.
