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Exponential Moving Average (EMA)

Introduction

The Exponential Moving Average is different from Simple Moving Average by both calculation method and in the way that prices are weighted. The Exponential Moving Average is effectively a weighted moving average. With the EMA, the recent days' prices are given more weight than older prices. The basic idea behind this theory is that more recent prices are considered to be more important than older prices.

Calculation of the EMA is a little more complex than the SMA. EMA has one advantage that a large record of data covering each and every closing price for the last 200 days (or however many days are being considered) does not have to be kept. To calculate the, EMA all we need is the EMA of previous day and the closing price of current day.

Formula

EMA = {Close – EMA(previous day)} * multiplier + EMA(previous day)
                Multiplier = (2 / (Time periods + 1))

Advantage

The benefit of the EMA indicator is its visual simplicity. Traders can quickly assess the prevailing trend of price behavior from the direction of the EMA. Care must be taken since the EMA is a lagging indicator and may not adjust rapidly to volatility in the market.

Sample Calculation

Technical chart for EMA

Technical Indicators

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