Exponential Moving Averages (EMA’s) follow price. In fact, all indicators show history. In all the years I’ve been trading, I have never found any indicator that is predictive in nature*. All indicators show some form of where price was, not where it is going.
So, to suggest that the price ‘must’ go in a certain direction is just wishful thinking. The price doesn’t ‘have to ‘ go anywhere; it goes to where buyers and sellers take it.
A benefit of watching EMA’s is to give us an idea of the elasticity of the price away from its average, however you want to calculate it. Generally speaking, if the stock moves far from its 10 or 20 EMA, it may well snap back at some point, but not because of the EMA but rather due to some other reason, such as profit taking or news.
I also look to EMA’ as support and resistance levels. Prices tend to bounce off these levels as they traverse a longer term trend. As you know, prices do not move in straight lines but zig zag along the path. My strategy involves watching longer term charts, studying the 5 minute but triggering off the 1 minute chart. Small but frequent gains add up nicely over the course of a morning while somewhat insulating the trader of a massive daily loss. By that I mean that I may accept losing trades but my aim is to not have any losing days.
EMA’s also provide insights into the strength of support and resistance. If the 10 and 20 EMA’s converge, they provide double the effect of a support or resistance level… something every trader needs to be aware.
Probably my most important indicator is the lowly EMA. It measures the moving average of the stock, exponentially giving more weight to the point closest to its current price. So simplistic, yet so powerful, I could never execute a trade without it.
Head Trader, DayTradeSPY