What is the Exponential Moving Average (EMA)?

In crypto trading, investors frequently rely on technical indicators to forecast market trends and develop trading strategies.

Gate.io offers several essential technical indicator tools. In the K-line chart interface of the Pro version, click on the “Technical Indicators” icon, and a pop-up window will appear with the indicators you can choose from, most of which are most commonly used by EMA, MACD, RSI, and other technical indicators.

This article will focus on the EMA moving average, what data it is based on, how it differs from the MA, and how to use it to improve your trading.

Exponential Moving Average (EMA)

EMA (Exponential Moving Average) is a technical tool that can analyze an asset’s trend in the stock and financial markets.

The EMA calculation method takes and smooths a weighted average of asset prices over a specified period. In this context, “smoothing” refers to applying an arithmetic process that somewhat eliminates the effects of noise and volatility and brings the forecast closer to the market trend.

EMA is used to predict future asset price trends because it combines past and current data, making the forecast more accurate.

The formula for calculating the EMA is as follows:

EMA (N) = Smoothing Constant Current Price + (1 - Smoothing Constant) EMA (N-1), N represents the number of observations for that period.

The calculation of the EMA requires the value of the previous EMA and the smoothing constant and generally uses the MA of the first day as the initial value of the EMA. Smoothing constant = 2 / ( N + 1 ). The size of the smoothing constant depends on the period of the EMA. The smaller the period, the larger the smoothing constant and the higher the weight of the current price.

The EMA is the value generated by weighting the daily highest and lowest price levels according to the period.

The daily EMA values are linked to one another: the day’s EMA. In practice, you don’t need to calculate the EMA, the chart will show you the calculated value.

The Difference Between EMA and MA

MA stands for Moving Average, and it is calculated by taking the daily closing price and linking it to the average price calculated based on the number of days. The EMA is a weighted average of asset prices over a certain period, which means it is closer to the market and tends to respond more quickly to price changes than the MA.

Let’s take for example the ETH/USDT pair on Gate.io:

The blue line in the chart represents EMA 9, and the red line represents MA 9.

The blue EMA line is below the red MA line at the start of a downward trend, while the blue EMA line is above the red MA at the start of an upward trend. Both are parameters 9. In a trend, the EMA moves faster than the MA.

Use Of EMA

With the above explanation, it is clear that EMA is an accelerated version of MA, and its application is identical to MA. EMA can determine support and resistance during the trading process in general.

Take the four-hour K-line chart of ETH/USDT on the Gate.io platform as an example.

In a down market, the price near the EMA line forms the first buy point when it crosses the EMA line from bottom to top for the first time. When the price first pulls back near the EMA line on the way up, a second buy point is formed, and a third buy point is formed when the price drops back down above the EMA line and hits the EMA line.

The fourth buy point is formed when the price moves away from the EMA line for the first time and then breaks through it again before returning to the EMA line for support.

The EMA line will also have four resistance selling points. In a rising market, when the price falls below the EMA line for the first time (generally refers to the K-line closing price below the EMA being broken), then the price near the EMA line forms the first sell point. If the price breaks down, starts a rally, and goes away from the EMA line, the price comes to the previous highest level near the second sell point. When the price rises and falls below the EMA line for the second time, it forms the third sell point. During the downward trend, when the price rebounds close to the EMA line, it creates the fourth selling point.

Of course, in the long downtrend that followed, the EMA resistance line was reached several times, also giving a sell signal.

Use Of the Combination EMA

In the cryptocurrency market, the term “Golden Cross” or “Death Cross” is frequently used to describe a combination of long-period and short-period lines and the crossover of two or more lines to give the market a signal. This method is also applicable to EMA lines.

First, set up two EMA lines, one short-period and one relatively long-period, such as EMA10 and EMA30 (10 for the last 10 days and 30 for the previous 30 days), and select parameters that are as close to your trading style as possible.

When the short-period EMA line crosses the long-period EMA line upwards, and the long-period EMA line is flat or rising, the intersection of the two lines forms a “golden cross”, a bullish trend.

Take ETH/USDT on the Gate.io platform as an example. When EMA10 crosses EMA30 from the bottom up, a “golden cross” is formed, and an upward trend starts afterward.

A bullish trend is also seen when the short-period EMA line falls below the long-period EMA line and then quickly rises again, or when the short-period EMA line falls close to the long-period EMA line and then rises again.

When the short-period EMA line crosses the long-period EMA line downward, and the long-period EMA line is flat or falling, the intersection forms a “Death Cross,” indicating a bearish trend.

Take the daily chart of ETH/USDT on the Gate.io platform as an example. On April 15, 2022, EMA9 started to cross EMA30, forming a death cross, and began a longer-term downtrend.

Furthermore, when the short-period EMA line breaks the long-period EMA line and then quickly breaks the long-period EMA line again, or when the short-period EMA line reverses close to the long-period EMA line and then turns down again, it is a continuation of the bearish trend.

It is important to note that when the trend of long and short-period lines is not synchronized, the signal is likely false. For example, when the long-period EMA line is up and the short-period EMA line crosses the long-period EMA line down, or when the long-period EMA line is down and the short-period EMA line crosses the long-period EMA line up, these are false signals that should be bought or sold with caution.

Conclusion

The EMA is a smoothed weighted average that, like all moving averages, can be used to determine support and resistance. It is more responsive than moving averages due to its unique calculation method, making it more suitable for traders with an aggressive bias.

It should be noted, however, that the EMA indicator is a calculated value based on past prices and cannot predict future prices. Investors should manage risk and invest prudently based on their circumstances.