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    G4-T3 Exponential Moving Average (EMA)

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    The document explains exponential moving averages (EMA) and how they differ from simple moving averages (SMA). EMAs give more weight to recent price data, reducing the impact of outliers, so the average is less distorted by spikes and drops and better reflects current market conditions. In an example, a large one-day price drop caused the 5-day SMA to fall significantly, while the EMA would be influenced less since it emphasizes more recent prices. The document concludes that EMAs provide a closer representation of recent price action than SMAs.

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    G4-T3 Exponential Moving Average (EMA)

    Uploaded by

    The Shit
    75 views4 pages
    The document explains exponential moving averages (EMA) and how they differ from simple moving averages (SMA). EMAs give more weight to recent price data, reducing the impact of outliers, so the average is less distorted by spikes and drops and better reflects current market conditions. In an example, a large one-day price drop caused the 5-day SMA to fall significantly, while the EMA would be influenced less since it emphasizes more recent prices. The document concludes that EMAs provide a closer representation of recent price action than SMAs.

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    The document explains exponential moving averages (EMA) and how they differ from simple moving averages (SMA). EMAs give more weight to recent price data, reducing the impact of outliers, so the average is less distorted by spikes and drops and better reflects current market conditions. In an example, a large one-day price drop caused the 5-day SMA to fall significantly, while the EMA would be influenced less since it emphasizes more recent prices. The document concludes that EMAs provide a closer representation of recent price action than SMAs.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    75 views4 pages

    G4-T3 Exponential Moving Average (EMA)

    Uploaded by

    The Shit
    The document explains exponential moving averages (EMA) and how they differ from simple moving averages (SMA). EMAs give more weight to recent price data, reducing the impact of outliers, so the average is less distorted by spikes and drops and better reflects current market conditions. In an example, a large one-day price drop caused the 5-day SMA to fall significantly, while the EMA would be influenced less since it emphasizes more recent prices. The document concludes that EMAs provide a closer representation of recent price action than SMAs.

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    You are on page 1of 4

    Exponential Moving Average (EMA) Explained

    As we said in the previous lesson, simple moving averages can be distorted by spikes.
    We’ll start with an example.

    Let’s say we plot a 5-period SMA on the daily chart of EUR/USD.

    The closing prices for the last 5 days are as follows:

    Day 1: 1.3172

    Day 2: 1.3231

    Day 3: 1.3164

    Day 4: 1.3186

    Day 5: 1.3293

    The simple moving average would be calculated as follows:

    1
    (1.3172 + 1.3231 + 1.3164 + 1.3186 + 1.3293) / 5 = 1.3209
    Simple enough, right?

    Well, what if there was a news report on Day 2 that causes the euro to drop across the
    board.
    This causes EUR/USD to plunge and close at 1.3000. Let’s see what effect this would
    have on the 5-period SMA.

    Day 1: 1.3172

    Day 2: 1.3000

    Day 3: 1.3164

    Day 4: 1.3186

    Day 5: 1.3293

    The simple moving average would be calculated as follows:

    (1.3172 + 1.3000 + 1.3164 + 1.3186 + 1.3293) / 5 = 1.3163


    The result of the simple moving average would be a lot lower and it would give you
    the notion that the price was actually going down when in reality, Day 2 was just a
    one-time event caused by the poor results of an economic report.

    The point we’re trying to make is that sometimes the simple moving average might
    be too simple.
    If only there was a way that you could filter out these spikes so that you wouldn’t get
    the wrong idea.

    Hmm… Wait a minute… Yep, there is a way!

    2
    It’s called the Exponential Moving Average!

    Exponential moving averages (EMA) give more weight to the most recent periods.

    In our example above, the EMA would put more weight on the prices of the most
    recent days, which would be Days 3, 4, and 5.
    This would mean that the spike on Day 2 would be of lesser value and wouldn’t have
    as big an effect on the moving average as it would if we had calculated for a simple
    moving average.

    If you think about it, this makes a lot of sense because what this does is it puts more
    emphasis on what traders are doing recently.

    Exponential Moving Average (EMA) vs.


    Simple Moving Average (SMA)
    Let’s take a look at the 4-hour chart of USD/JPY to highlight how a simple moving
    average (SMA) and exponential moving average (EMA) would look side by side on a
    chart.

    3
    Notice how the red line (the 30 EMA) seems to be a closer price than the blue line (the
    30 SMA).

    This means that it more accurately represents recent price action. You can probably
    guess why this happens.

    It’s because the exponential moving average places more emphasis on what has been
    happening lately.

    When trading, it is far more important to see what traders are doing NOW rather than
    what they were doing last week or last month.

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