How should I use EMA to identify stock price trend?
(Case Study on Ping Identity Stock price)
What is EMA?
Exponential Moving Average (EMA) measures the trend direction over a period of time. Different from SMA, EMA applies more weight to data that is more current. Because of its unique calculation, EMA will follow prices more closely than a corresponding SMA.
How EMA indicator works?
- Use the EMA to determine trend direction, and trade in that direction. When the EMA rises, considering stock purchase when prices dip near or just below the EMA. When the EMA falls, considering sale when prices rally towards or just above the EMA.
- Moving averages can also indicate support and resistance areas. A rising EMA tends to support the price action, while a falling EMA tends to provide resistance to price action.
Althougth Moving averages may help you trade in the general direction of a trend, but with a delay at the entry and exit points.
How to calculate EMA?
EMA = (K x (C - P)) + P
Where:
C = Current Price
P = Previous periods EMA
K = Exponential smoothing constant
The smoothing constant K, applies appropriate weight to the most recent price. It uses the number of periods specified in the moving average
P1, P2, P3 are generally taken on the 5th, 10th, 20th days.
P1 day, P2 day, P3 day smooth moving average of the closing price.
Case study: PING Identity
Recently, Goldman Sachs Adjusts Ping Identity's Price from $28 to $31, you may ask yourself a question, should I follow?
Below is PING Identity stock chart and EMA extracted from moomoo app
From the above chart, we can find out that EMA 5 (days), EMA 10 (days), EMA 20 (days) all move up, this is a strong indicator that PING stock price will goes up, however, identifing trend only tells us that stock price will move up or down, it will not tell us when is the best time to buy or sell, in order to find the best time to buy or sell we need to do more research from other indicators including Volatility, Oscillator, Momentum