Also called “exponentially weighted moving averages” or simply EMA. The advantage of the EMA versus the simple moving average is that it reduces the “lag” by weighting more recent prices more than older prices.
Like all moving average indicators, they are much better suited for trending markets. When the market is in a strong and sustained uptrend, the EMA indicator line will also show an uptrend and vice-versa for a down trend. A vigilant trader will not only pay attention to the direction of the EMA line but also the relation of the rate of change from one bar to the next. For example, as the price action of a strong uptrend begins to flatten and reverse, the EMA’s rate of change from one bar to the next will begin to diminish until such time that the indicator line flattens and the rate of change is zero.
Because of the lagging effect, by this point, or even a few bars before, the price action should have already reversed. It therefore follows that observing a consistent diminishing in the rate of change of the EMA could itself be used as an indicator that could further counter the dilemma caused by the lagging effect of moving averages.
In general: the shorter the EMA, the more weight on the latest prices.