Technical Glossary / Technical Indicators – Trend Indicators
Exponential Moving Average (EMA)
A moving average that weights recent closes more than old ones.
Teaching sketch. It shows the shape, not a live quote and not a trade signal.
Formula
Multiplier = 2 / (N + 1). EMA = close x multiplier + prior EMA x (1 - multiplier). A 20-period EMA uses 2/21.
Definition
The exponential moving average never fully drops an old price, but the weight of old prices decays. It hugs price more closely than an SMA of the same length and turns sooner. It still lags. It is a weighted history, not a leading indicator.
How it works
The first EMA value has to start somewhere, usually with an SMA. For a long history the starting point stops mattering. Shorter N reacts faster and whipsaws more. Longer N is smoother and later.
How traders use it
Traders use a 12 and 26 EMA inside MACD, and standalone EMAs such as 9, 20, and 50 as dynamic support in trends. The pullback to a rising EMA is a location. The bounce has to show up on price.
Common mistakes
Optimising N until a backtest looks perfect. A 17 EMA that beat a 20 EMA on one sample is usually noise. Also stacking EMA signals on top of SMA signals and calling it confluence when both are the same closes.
Limitations
EMA follows. In a crash it will be above price the whole way down, looking like resistance after the fact. It will not call the bottom.
This note explains the term. A sketch shows the shape of the idea. Neither is a recommendation, a signal, or a comment on any security. Indicator settings and exchange conventions differ. Check the live chart and the contract specification before you use a number.