Leavitt Brothers: Forget the Fundamentals

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Exponential Moving Average

An Exponential Moving Average (EMA) is plotted as a line directly on a stock's price chart. Like the simple moving average, it is the average value of a stock's price over a specified number of time intervals, but the exponential moving average applies more weight to recent trading action.

Stocks have a tendency to either “ride” their moving averages or completely ignore them. If a stock tends to ride its MA, traders use the line as a buy or sell point.

That is a very simplified strategy and works great with some stocks, but offers no assistance with entries and exits with other stocks. The prudent trader needs to do some homework to see which MA's (if any) work best with a particular stock.

Some traders also like to plot two different moving averages (typically a longer-term line and a shorter-term line) on the same stock chart and use the crossing of the longer-term line by the shorter-term line to give buy and sell signals. But again, the prudent trader needs to play around with different MA's to see what works best for each stock and for his/her trading style.

CORI is a great example of a stock that likes to ride its Exponential Moving Average. Each time the stock rallied away from it, the stock paused to allow the EMA to "catch up." Then the moving average acted as support, and the stock moved up again.

Some traders will plot two different moving averages over a stock chart and use the cross of the longer term moving average by the shorter term MA for buy and sell signals. This type of strategy works well with gently rolling stocks that do not gap, and it worked will for TV above (note this is a 60-minute chart). But don't try this with high beta volatile stocks because too many false signals are suggested.

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