If you’ve never used a technical indicator to help with your trading, you’re missing out.  Indicators won’t tell you exactly when to buy and sell, but they can help you with your timing and analysis.  One of the most commonly used indicators is the exponential moving average, or the EMA.  It’s similar to a normal moving average (MA), but EMAs react more quickly to more recent movements in price, so they’re a bit better at gauging recent trends.

If you’re a day trader, or if you don’t hold positions overnight, the EMA can help you analyze the movement of a stock.  To illustrate this point with an example, we can look at how the market moved today (December 2), with relation to its EMA.

Below is a graph of the intra-day price movements of the S&P 500.  When the market first opened, it was highly positive, with a lot of upward sentiment.  However, as the trades that had built up right before the open were settled, and traders were able to more closely analyze the economic situation as of that day, things started to turn negative.

At around 11:30 AM, a distinct pattern had emerged.  With the exception of one or two quick ticks, the S&P 500′s 50-period EMA consistently acted as a ceiling for the price of the index.  You can clearly see that, throughout the day, whenever the S&P 500 would rise to meet its 50-period EMA, it would consistently fall back down.  In fact, after 1 PM, it failed to remain above its 50-period EMA for more than a couple of minutes.

This is very clearly a bearish indicator.  When a stock or index’s EMA repeatedly acts as support or resistance, you should take note, and may want to think about following the trend that it’s setting.  In today’s case, especially, you would have done well to initiate bearish positions once you realized the pattern was holding.

This isn’t the only scenario where the EMA can help you trade.  Many traders use crossovers to help them determine trends.  If a stock (or index) crosses its EMA, some traders use it to determine the start of a new trend.  Of course, you could get false signals if the stock or index continually crosses its EMA, but if you’re able to use it effectively, the EMA can clearly show you where its underlying security is likely to go in the near or long-term.

Hopefully you were able to take advantage of today’s price movement.  If not, you should consider adding an overlay of the underlying security’s EMA to your charts.  When you learn to use these types of indicators properly, you add a variety of tools to your trading toolbox, and that can help improve your results dramatically.