Exponential Moving Average

Exponential Moving Average

The exponential moving average, also known as exponentially weighted moving average, reduces the lag in SMA as it provides greater weight on recent prices. As contrast to SMA, the EMA doesn’t eliminate previous prices when computing the values; thus, it responds more quickly relative to price changes.

EMA is calculated by taking the difference between the current EMA and the previous EMA, and multiplied by a smoothing constant which depends on the given number of periods. The resulting value is then added to the previous EMA. The first calculation for EMA starts with SMA value and after that, the normal formula takes over. Below is the formula for an EMA:

 

Which one is better: Simple Moving Average or Exponential Moving Average? The answer depends upon the traders’ preferences with regard to security, number of periods taken in consideration and sensitivity relative to price behavior.

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