The moving average is the most widely used indicator utilized by traders, analysts and fund managers. The Exponential Moving Average is a more responsive version of the simple moving average in that it calculates and plots an exponentially weighted average of prices from each of the most recent number of bars specified by the parameter used.
The formula for which is as follows:
EMA = EMA t-1 + SF * (Pricet - EMA t-1)
Where: SF = 2 / (1 + Length of Average)
Any new value will integrate the current price along with the value from the previous bar and weighted by a smoothing factor. This means an Exponential Moving Average gives greater weight to the market's most recent price and a reduced weighting to older prices, as opposed to the simple moving average, which gives equal weight to all the prices in the series.
A moving average is usually utilized for identification of the underlying trend. Some investors who use this technique are of the opinion that a rising moving average value and price positioned above the moving average indicates an uptrend. Therefore a declining moving average value and price positioned below the moving average would point to a downtrend.
MODIFIED EXPONENTIAL MOVING AVERAGE
The Modified Exponential Moving Average is comparable to the standard exponential moving average, differing only in how the smoothing factor is calculated. The smoothing factor is the part of the formula that changes the number of bars to be considered into a decimal that symbolizes that length.
While a standard exponential moving average formula looks like this:
EMA = EMA t-1 + SF * (Pricet - EMA t-1)
Where: SF = 2 / (1 + Length of Average)
The formula for a modified version is fundamentally the same, except that the smoothing factor is calculated as follows:
SF = 1 / Length of Average
The result of the different smoothing factor essentially slows the average, but there will be equivalents. For example, you can calculate the modified smoothing factor by substituting the result of the standard smoothing factor into the modified equation.
Disclimer: This website is for informational purposes only and is not intended to provide
specific commercial, financial, investment, accounting, tax, or legal advice.
History
