UK Accounting Glossary
EMA – Exponential Moving Average is a type of moving average that is similar to a simple moving average, except that more weight is given to the latest data. The Exponential Moving Average is also known as “exponentially weighted moving average”.
The Exponential Moving Average is recognized by many as being the most reliable of the moving averages. The EMA is more responsive and less susceptible to whipsaw in moving average crossover strategies.
The progressive weighting makes the Exponential Moving Average immune to the “bark twice” scenario: once at the start of the moving average period and again in the opposite direction, at the end of the period.
An exponential moving average is a more complicated form of a simple moving average, which calculates the average price of a security over a specific period of time. The exponential moving average gives more weight to the latest (most recent) price data and gives less weight to the older, more historical data. For example, in a 10-day exponential moving average, the most recent 5 days have more value than the first 5. An exponential moving average actually reacts faster to recent price changes than a simple moving average. The idea behind the exponential moving average is that it provides stronger and earlier trend detection. The exponential moving average’s method of giving more weight to recent data is essentially an attempt to reduce the lag of the simple moving average. One method for calculating an exponential moving average (EMA) takes a percentage (P) of today’s total price (T) and adds in the prior day’s exponential moving average (Y) times 1 minus that percentage: (T*P)+(Y*(1-P)) = EMA. The exponential percentage (P) used to calculate an exponential moving average equals 2/(time periods+1).
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This glossary post was last updated: 22nd March, 2020