The data item is defined as the percentage difference between the close price of the stock and the exponential moving average of close price over the previous 1 month. Suppose current stock price is Rs.30 and previous 1 month exponential average price is Rs.28, the data item is calculated as (30/28) – 1 = 7.14%.
The exponential moving average (EMA) helps understand the momentum of the stock. An EMA is very similar to simple moving average, however the former gives more weight to the latest data. Because of this, EMA is more sensitive to recent price changes compared to simple moving average. A rising EMA shows that prices are generally increasing and vice versa if EMA is falling.
Price momentum is the rate of change in price of a particular stock. Momentum investing is a strategy that tries to understand the existing trend in the market and attempts to capitalize on the same.
If a momentum investor feels that the bull run in the market will continue, he/she will buy stocks whose prices are increasing in order to benefit from the trend. If he/she feels that the market is in bear phase and stocks will continue to go down, he/she will sell stocks with negative momentum in order to gain from the trend. Once the momentum investor identifies the trend he/she can use the percentage price above 1M EMA to shortlist stocks that have either been trending higher or dropping down.