Exponential moving average also called as exponentially weighted moving average is calculated by applying more weight to recent prices relative to older prices. In order to reduce the lag in simple moving averages, technicians often use exponential moving averages. The weighting applied to the most recent price depends on the specified period of the moving average. The shorter the EMA’s period, weight is applied to the most recent price. For example: a 10-period exponential moving average weighs the most recent price 18.18% while a 20-period EMA weighs the most recent price 9.52%. As we’ll see, the calculating and EMA is much harder than calculating an SMA. The important thing to remember is that the exponential moving average puts more weight on recent prices. As such, it will react quicker to recent price changes than a simple moving average. Here’s the calculation formula.

Exponential moving average calculation

Exponential Moving Averages can be specified in two ways – as a percent-based EMA or as a period-based EMA. A percent-based EMA has a percentage as its single parameter while a
period-based EMA has a parameter that represents the duration of the EMA. The formula for an exponential moving average is:

EMA (current) = ((Price (current) – EMA (prev)) x (Multiplier) + EMA (prev)

For a percentage-based EMA, “Multiplier” is equal to the EMA’s specified percentage. For a period-based EMA, “Multiplier” is equal to 2 / (1 + N) where N is the specified number of periods.

For example, a 10-period EMA’s Multiplier is calculated like this:

This means that a 10-period EMA is equivalent to an 18.18% EMA.

The 10-period simple moving average is used for the first calculation only. After that the previous period’s EMA is used.

Note that, in exponential moving average, every previous closing price in the data set is used in the calculation. The impact of the older data never disappears though it diminishes over a period of time. This is true regardless of the EMA’s specified period. The effects of older data diminish rapidly for shorter EMA’s than for longer ones but, again, they never completely disappear.

Simple versus exponential

Generally you will find very little difference between an exponential moving average and a simple moving average. Consider this example which uses only 21 trading days, the difference is minimal but a difference nonetheless. The exponential moving average is consistently closer to the actual price. On average, the EMA is 3/8 of a point closer to the actual price than the SMA.