|
|
|
|
Exponential moving averages are another form of weighted averaging. In a standard moving average, the oldest price in a fixed series is dropped. By contrast, all prices in a chart influence an exponential moving average: older prices gradually diminish in significance.
Formula:
Where:
EMAt = current moving average value
EMAt-1 = previous moving average value
SF = smoothing factor: 2/n+1,
where n is the equivalent number of days in a standard moving average.
Pt = current price
The definable parameter for an exponential moving average is a smoothing factor. A smoothing factor for an exponential moving average is a number between zero and one (i.e., 0.5). While the equations governing a smoothing factor are complex, the usage of an exponential moving average is simple. Larger smoothing factors approximate shorter standard moving averages. The larger the smoothing factor, therefore, the more responsive the exponential moving average is to current prices.