Exponential Moving Average PDF- Understand more about EMA and download more documents on this topic in this article.
Exponential moving averages (EMA) give more weight to the most recent periods.
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:
(1.3172 + 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!
It’s called the Exponential Moving Average!