The Series of Technical Analysis Studies Chapter 2: “Exponential Moving Average”

What is an Exponential Moving Average?
The Exponential Moving Average (EMA) is similar to SMA but EMA gives more importance to recent price data than the simple moving average. It responds more quickly to recent price changes than SMA.

How does it work?
Steps to manually calculate 10 days EMA:
1) Calculate the SMA
2) Calculate the multiplier for weighting the EMA
3) Calculate current EMA.
Formula: SMA: 10 period sum / 10
Weighting Multiplier: (2/ (selected time period + 1)) = (2/ (10 + 1)) = 0.1818 (18.18%)
Steps to add 10 days EMA in IRIS PLUS:
Open New Chart -> Press “S” -> Select Average -> Click on Parameter -> Enter “E” for EMA Paramiter -> Enter Number of days -> Click “OK”
EMA: (Closing price-EMA (previous day)) x multiplier + EMA (previous day)
The exponential moving average formula puts more weight on the recent price; which means it’s more reliable as it reacts faster to the latest changes in price. Basically, EMA tries to reduce the confusion and the noise of the everyday price action. The second thing that an exponential moving average does, is to smooth the price and to reveal the trend and sometimes it can reveal patterns that you couldn’t otherwise see.
Key points to remember:
  • Moving averages alone are rarely the totality of a trading strategy, and most traders complement their use of moving averages with other technical indicators.
  • Many traders depend heavily on the use of EMAs in their chosen trading strategies, but usually include other technical indicators in their analyses as well.
  • 5 & 20 days EMA are widely used by the traders for their trading.

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