Exponential Moving Averages - EMA
TradeWithPros incorporates 3 moving averages into its educational charting system. Moving averages are the most popular tool in technical analysis. Many indicators, such as the MACD are developed from moving averages. Stocks tend to follow moving averages. Moving averages can provide insight to stock price movement.
A moving average is an average of prices created over a set period of time, as short as a few days or as long as years. For example, a simple daily 5 moving average on close would be the average of the closing prices over the past 5 days. Do not fear, you need not know the math behind any indicator, your charting program will do that for you!
There are many types of moving averages, the most common being simple (SMA) and exponential (EMA). TradeWithPros educational charts use exponential moving averages. With an exponential moving average, more weight is applied to the more recent prices versus an even distribution of a simple moving average. The EMA attempts to reduce the signal lag time found in a simple moving average by placing more importance on the most recent price activity.
Traders use moving averages as support and resistance, signal lines and as trend following instruments. The settings for moving averages are a trader’s own preference. TradeWithPros prefers the 13, 34 and 200 EMA.
The following is IBM with the 13, 34, and 200 EMA.
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