Exponential Moving Average (EMA)

Definition

Exponential Moving Average (EMA) is a type of weighted moving average where the weights decrease exponentially, giving more significance to recent price data.

It is quite similar to the Simple Moving Average (SMA). EMA reacts faster than SMA, meaning it turns earlier than SMA and is more sensitive to recent price changes. Therefore, the EMA indicator helps filter out noise in daily price actions, reducing lag in time data and avoiding distortions from insignificant correlations.

Calculation

The formula for calculating EMA is as follows:

EMAt​=Pt * (α/n+1) +EMAt−1 *[1−α/(n+1)]

Where:

• Pt is the current price,

• EMAt−1​ is the previous day's EMA value,

• n is the number of days,

• α is the smoothing factor, commonly chosen as 2, typically calculated as α=2/n+1​. This value enhances the credibility of the most recent data points. A larger smoothing factor increases the impact of the latest data on the moving average line.