Exponential Moving Average (EMA) is similar to Simple Moving Average (SMA), except that there are more weight is given to the latest data.

Simple Moving Average is the average of the stock closing price for certain number of day in the past (depends on the number of days you analyze), for example if you want to calculate the last 13 days simple moving average, the you just need to add the last 13 days closing price and divide the number by 13.

Exponential Moving Average is slightly complicated, it weights the most recent data more heavily. The formula to weight the current trading day’s value is 2/(n+1), where ‘n’ is the number of day of the moving average. The result will then be added to the previous day EMA.

The formula to calculate EMA

EMA = (S * (C-P)) + P

S = Smoothing Constant
C = Current Closing Price
P = Previous Closing Price

Formula for Smoothing Constant is:

S = 2/(1+N)

N = Number of days for EMA

Trading signals

The most simple trading are given when EMA crossover stock price. When EMA crossed stock price from top, it gives a bearish signal, on the other hand, when EMA crossed stock price from bottom, it gives a bullish signal.

Some other traders may look for crossover of long term and short EMA for trading signal, eg: when a short term EMA (12 or 26-days) crossover a long term EMA (50 or 200 days) from the top, it gives a sell signal and vice-versa.

We strongly recommend you to combine EMA with other indicators as a confirmation to buy or sale.