Introduction :

Moving Averages are one of the simplest indicators to understand, calculate and use. They have been around since a very long time. They are so versatile that they are often used in calculating other indicators like the Bollinger Bands, Alligator, TRIX etc.

They are generally trend following and lagging in nature. While there are various different types of moving averages, the most commonly used ones are Simple Moving Average and Exponential Moving Average. In this article, we will be particularly discussing the Exponential Moving Average. To have more clarity, we will be comparing EMA and SMA at various places.

Comparing Exponential Moving average with the Simple Moving Average :

Table 1 : EMA V/s SMA Comparison

The last point in the table can be a little tricky to understand. To understand it clearly, we will first need to look at how both the moving average are calculated.

SMA = (N Period Sum)/N

This is a fairly simple calculation. It simply means that to calculate the 10 period SMA, the close prices of the latest 10 candles will be added and this sum will be divided by the period i.e 10.

EMA(t) = Price(t) x k + EMA(y) x (1-k)

Where,

Price(t) = Today’s close price, k = Weighted Multiplier and EMA(y) = yesterday’s EMA value. k or the weighted multiplier is calculated as, k = 2/(N+1). N is the period for which the EMA needs to be calculated.

For eg. : If the period of EMA is 10, the k will be 2/(10+1) = 18.18%. As the mumber of period increases, the value of weight will decrease however the highest weight will still remain with the latest data.

One noteworthy point here is that the calculation of exponential moving average for each day requires the EMA of the previous day as well, which implies that the EMA value of each and every day right from the beginning of the chart will be included in the calculation of the latest EMA value. Eg. If we are calculating 50 period SMA, the price on 51st day prior to today will be completely dropped from the calculation and have no impact. However this will not be the case for EMA. Due to this fact, it is possible to observe slightly different EMA values on different charting platforms depending on the availability of historical data.

Observing the difference on chart :