Hello, I am new to trading. Wish to trade on weekly or monthly time frames. Which EMAs should I use. cecilgami

Question

How can one determine which time periods are the best for EMAs for different time frames. Could you kindly explain or clarify. Thank You. CecilGamini

Answer 1

The reason you are thinking of using an Exponential Moving Average rather than a Simple Moving Average is because you are trying to time the buying or selling of a stock based on a change in trend - which becomes more apparent if you use an EMA rather than a SMA. This allows you to get ahead of other analysts who chart the market. The time period used is crucial - it would take a 200 day moving average longer to change directions than a 50 day moving average. Having said that, the longer time period results in a much smoother line and less "false signals" of a change of trend. You are more likely to be whipsawed by a change of direction when you use a short period - say 10 or 20 days.

Personally I wouldn't use a single EMA but two of different lengths - 50 day and 200 day. When the 50 day EMA moved above the 200 day EMA would be a "buy signal" and when the 50 day EMA moved below the 200 day EMA would be a "sell signal".

It is simple on Yahoo Finance to backtest moving averages of various lengths for buy/sell signals until you find one that works for you.

Answer 2

Actually, there is a hidden reason for using an EMA as opposed to an SMA. Has to do with discrete mathematics and something that in some fields is called "aliasing". SMAs produce some interesting results if their time length is a multiple of some underlying periodicity. Yeah, it is mathematical trivia, but it is more than is generally known. EMAs don't show that effect, just SMAs. And I also like the 50 and 200 crossing.

Answer 3

Why do you want to use EMA? Are you sure it really puts the odds in your favor? There are plenty of studies out there debunking certain technical analysis indicators, and I think moving averages is one of the more useless tools a trader can have. For a short study on the results of trading with moving averages, check out http://xinvesting.com/articles/columnists/investors_traders_part2.htm