Calculating EMA involves a slightly more complex formula as compared to SMA. The formula incorporates a multiplier that determines the weight of each price data point. Following are the steps to calculate EMA:
Determine the number of periods you want to use for the EMA.
Calculate the smoothing factor (SF) using the following formula: SF = 2 / (N + 1), where N represents the number of periods.
Start with the first periodâs SMA as the initial EMA value.
For each subsequent period, calculate EMA using the following formula: EMA = (Current Price â Previous EMA) Ă SF + Previous EMA
Repeat this calculation for each period, updating the EMA value accordingly.
Using the above formula, letâs calculate a 10-day EMA for a stock with the following closing prices: $25, $27, $26, $28, $29, $31, $30, $29, $28 and $27.
Weâll calculate a 10-period EMA.
Determine the smoothing factor: SF = 2 / (10 + 1) = 0.1818
Start with the 10-day SMA as the initial EMA value: EMA = $28
Calculate the 10-day EMA for the second period: EMA = ($27 â $28) Ă 0.1818 + $28 = $27.1818
Repeat this calculation for each subsequent period to obtain the EMA values.
By plotting EMA on a chart, traders can visually analyze the relationship between the price and the EMA line to identify potential trading opportunities and make informed decisions.
Remember, the choice of EMA period depends upon the strategy and the desired level of responsiveness to price changes. Shorter EMA periods react more quickly but may be more susceptible to false signals, while longer EMA periods provide a smoother average but respond more slowly to price movements.