Exponential Moving Average
Exponential moving averages are recommended as the most reliable of the basic moving average types. They provide an element of weighting, with each preceding day given progressively less weighting. Exponential smoothing avoids the problem encountered with simple moving averages, where the average has a tendency to "bark twice": once at the start of the moving average period and again in the opposite direction, at the end of the period. Exponential moving average slope is also easier to determine: the slope is always down when price closes below the moving average and always up when price is above.
To calculate an exponential moving average (EMA):
- Take today's price multiplied by an EMA%.
- Add this to yesterday's EMA multiplied by (1 - EMA%).
If we recalculate the earlier table we see that the exponential moving average presents a far smoother trend:
|33.3% (or 1/3) EMA||16.3||16.5||14.4||15.2||16.2||16.4||16.6||16.8|
EMA% is the weighting attached to the current days value:
- 50% would be used for a 3-day exponential moving average;
- 10% is used for a 19-day exponential moving average; and
- 1% is used for a 199-day exponential moving average.
To convert a selected time period to an EMA% use this formula:
EMA% = 2/(n + 1) where n is the number of days
Example: The EMA% for 5 days is 2/(5 days +1) = 33.3%
Incredible Charts performs this calculation automatically when you select an EMA time period.