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.