Exponential moving average (EMA) is similar to SMA and WMA. It also shows the average price of the asset, helps to determine the trend and find its reversal points, and has a customizable period.
The difference is in the method of calculation. EMA, like WMA, assigns its weight to each price value, and the most important are the latest changes in the price of the asset. But, unlike WMA, the weight changes from each price to the previous one not linearly with EMA but by different values.
For example, the last price gets weight 2.0, the previous price — 1.6, going before it — 1.0 and so on. As a consequence, the EMA is faster than SMA and WMA, regarding how it responds to price fluctuations.
The exponential moving average is suitable for intra-day trading and trading on volatile assets. This indicator is convenient to use on a candlestick chart.
It is recommended to open a trade on the asset price reversal. If the EMA line has changed in direction, it turned up after moving down and vice versa, and crossed the chart candle, then the trend has changed.
If EMA stopped moving down, turned up and crossed the chart candle, most the asset price will most likely continue to rise. You can trade to increase.
If the moving average stopped moving up, turned down and also crossed the candle chart, the price of the asset will most likely continue to fall. You can trade to discrease.