Exponential Moving Average (EMA)
The Exponential Moving Average, or EMA, takes a different approach. It gives more weight to recent prices, making it more responsive to current market conditions. The formula for EMA involves a weighted multiplier and a smoothing constant. Here’s the formula:
EMA = (Current Price – EMA Previous Day) x Multiplier + EMA Previous Day
Multiplier: Calculated based on the chosen EMA period. It’s typically 2 / (1 + n), where n is the number of periods you’re using. For example, for a 10-day EMA, the multiplier would be 2 / (1 + 10) = 0.1818.
EMA Previous Day: The EMA value calculated for the previous day.
To start the EMA calculation, you usually use the SMA as the EMA for the first period. Then, you apply the formula to calculate subsequent EMA values.
EMA Use Case: EMAs are ideal for investors looking to capture short-term trends and react swiftly to market shifts. They are particularly popular among day-traders.
