Exponential moving average
Also known as: EMA
An exponential moving average is a that gives more weight to recent prices and progressively less weight to older ones, in contrast to a , which treats every price in the lookback period equally. The result is a line that reacts faster to new price changes while still smoothing out day to day noise.
The formula is:
EMA = (Current price x multiplier) + (Previous EMA x (1 - multiplier)), where multiplier = 2 / (N + 1)Because it responds more quickly to recent , an exponential moving average tends to hug the current price more closely than a of the same length, which makes it popular among traders who want a trend indicator with less lag, particularly for trading over shorter periods. The tradeoff is that faster reaction also means more sensitivity to short-term noise, so an EMA can generate more false signals in a choppy, than a that moves more slowly would.
The exponential moving average is also the building block behind several other widely used indicators, most notably , which is calculated directly from the difference between two EMAs of different lengths. Common EMA lengths traders watch include the 12-day and 26-day EMAs used in , along with the 21-day, 50-day, and 200-day EMAs used more generally to gauge trend direction over shorter and longer periods.