A:

The exponential moving average (EMA) is a weighted moving average (WMA) that gives more weighting, or importance, to recent price data than the simple moving average (SMA) does. The EMA responds more quickly to recent price changes than the SMA. The formula for calculating the EMA just involves using a multiplier and starting with the SMA.

[Note: Simple and exponential moving averages are just one form of technical analysis. Successful traders use many forms of technical analysis to make informed decisions. Investopedia's Technical Analysis course will show you how to use both chart patterns and technical indicators to identify opportunities and manage risk with over five hours of on-demand video, exercises and interactive content.]

The calculation for the SMA is very straightforward. The SMA for any given number of time periods is simply the sum of the closing prices for that number of time periods, divided by that same number. So, for example, a 10-day SMA is just the sum of the closing prices for the past 10 days, divided by 10.

The three steps to calculating the EMA are:

  1. Calculate the SMA.
  2. Calculate the multiplier for weighting the EMA.
  3. Calculate the current EMA.

The mathematical formula, in this case for calculating a 10-period EMA, looks like this:

SMA: 10-period sum/10

Calculating the weighting multiplier: (2 / (selected time period + 1)) = (2 / (10 + 1)) = 0.1818 (18.18%)

Calculating the EMA: (Closing price-EMA (previous day)) x multiplier + EMA (previous day)

The weighting given to the most recent price is greater for a shorter-period EMA than for a longer-period EMA. For example, an 18.18% multiplier is applied to the most recent price data for a 10 EMA, whereas for a 20 EMA, only a 9.52% multiplier weighting is used. There are also slight variations of the EMA arrived at by using the open, high, low or median price instead of using the closing price.

RELATED FAQS
  1. What are the best technical indicators to complement the Exponential Moving Average ...

    Utilize additional technical indicators to complement and improve a basic trading strategy that relies on exponential moving ... Read Answer >>
  2. What's the difference between moving average, weighted moving average and exponential ...

    Moving averages are one of the most popular tools used by active traders to measure momentum. In this FAQ, we'll take a look ... Read Answer >>
  3. How do I use Moving Average (MA) to create a forex trading strategy?

    Learn a simple forex trading that uses multiple moving averages and is designed to create low-risk, high-reward trading opportunities. Read Answer >>
  4. What are the best technical indicators to complement the Mass Index?

    Learn which other technical indicators can be most helpful to complement a market reversal trading strategy utilizing the ... Read Answer >>
  5. What are the main differences between Moving Average Convergence Divergence (MACD) ...

    Learn the differences between the moving average convergence divergence (MACD) and the relative strength index (RSI), and ... Read Answer >>
  6. What do the bracketed numbers following a technical indicator mean?

    In technical analysis, it is common to see a series of numbers following a given technical indicator, usually in brackets. ... Read Answer >>
Related Articles
  1. Trading

    Simple Vs. Exponential Moving Averages

    These technical indicators help investors to visualize trends by smoothing out price movements.
  2. Investing

    Adapt The 50-Day EMA To Enhance Your Trading

    The 50-day EMA has numerous applications in price prediction, position choice & strategy building
  3. Trading

    This Indicator Should Always Be Part Of Your Strategy

    The relationship between price, 200-day EMA and its slope of generate useful patterns that assist in price prediction and trade management.
  4. Trading

    The Most Important Moving Averages For Investors (AAPL, TLT)

    Investors focus on fundamental criteria to choose portfolio candidates but adding moving averages to their analysis will improve long-term performance.
  5. Investing

    Moving Average Bounce

    Find out how this simple trading strategy can be added into your trading arsenal.
  6. Trading

    Do Adaptive Moving Averages Lead To Better Results?

    These complex indicators can help traders interpret trend changes, but are they too good to be true?
  7. Trading

    Introduction to Swing Trading

    The swing trading style, between day trading and trend trading, may be a good one for beginners to try.
  8. Trading

    Weighted Moving Averages: The Basics

    We take a closer look at the linearly weighted moving average and the exponentially smoothed moving average.
  9. Trading

    Biotech Bottom Calls After Big Bounce (IBB, XBI)

    Biotech funds have bounced sharply after testing downtrend lows, setting off a wave of bottom calls.
  10. Trading

    3 Short Sales in the S&P 500 (AXP, KMX)

    The S&P 500 is testing the bull market high but many components have lagged badly, stuck in downtrends below their 200-day EMAs.
RELATED TERMS
  1. Exponential Moving Average - EMA

    A type of moving average that is similar to a simple moving average, ...
  2. Linearly Weighted Moving Average

    A type of moving average that assigns a higher weighting to recent ...
  3. Weighted Average

    An average in which each quantity to be averaged is assigned ...
  4. Weighted

    Weighted is a description of adjustments to a figure to account ...
  5. Portfolio Weight

    The percentage composition of a particular holding in a portfolio. ...
  6. Purchase Price

    The price that an investor pays for a security. This price is ...
Hot Definitions
  1. Internal Rate of Return - IRR

    Internal Rate of Return (IRR) is a metric used in capital budgeting to estimate the profitability of potential investments.
  2. Limit Order

    An order placed with a brokerage to buy or sell a set number of shares at a specified price or better.
  3. Current Ratio

    The current ratio is a liquidity ratio that measures a company's ability to pay short-term and long-term obligations.
  4. Return on Investment (ROI)

    Return on Investment (ROI) is a performance measure used to evaluate the efficiency of an investment or compare the efficiency ...
  5. Interest Coverage Ratio

    The interest coverage ratio is a debt ratio and profitability ratio used to determine how easily a company can pay interest ...
  6. Cash Conversion Cycle - CCC

    Cash conversion cycle (CCC) is a metric that expresses the length of time, in days, that it takes for a company to convert ...
Trading Center