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Exponential Moving Average (EMA) Indicator

An exponential moving average is a form of a weighted moving average.  To construct a 20 day exponential moving average you must first construct a 20 day simple moving average.  This simple moving average is the starting point for the exponential moving average.  Assume that the simple moving average value for day 20 is 42; the simple moving average value for day 21 is 43; and the simple moving average value for day 21 is 44. We then subtract the day 20 moving average value from day 21 simple moving average value and get a difference of 1.00.  This value (1.00) is multiplied by an exponent.  In this case, the exponent is .1.  We then add .1 to the simple moving average value of day 20.  The exponential moving average value of day 20 now becomes 42.100.  To calculate the exponent, divide 2 by the time period.  In our case, we divided 2 by 20 to arrive at .1.

The exponential moving averages are believed to have higher sensitivity to the current price action, which arguably is more relevant.  The quicker signals may come at the risk of more "false" signals. It is recommended that the trading system that utilizes moving averages test with both the simple and exponential to see which one works out best.

See Also

Exponential Moving Average (EMA) Indicator Developer Help

Double Exponential Moving Average (DEMA) Indicator

Triple Exponential Moving Average (TEMA) Indicator

Moving Average Convergence/Divergence (MACD) Indicator