Exponential moving average

Another type of [[Moving Averages|moving average]] is the Exponential Moving Average (EMA). It can be considered as weighted MA which weights are decreasing exponentially with the remoteness of the trading period taken for calculation starting from the current one. Such distribution makes it possible to concentrate on the current prices in the process of analysis and not to omit the important trading signals. The EMA reduces the lag, giving more significance to the newest prices compared to the older prices. This makes it possible to react more quickly to the current price variations, opposed to SMA. The weight, applied to the latest price, depends on the SMA period. The shorter the EMA period is, the higher weight will to the most recent price be given. For example, a 10-period EMA gives the weight to the last price equal to 18.18%, at the same time a 20-period EMA - only 9.25%. However, calculation of the EMA is more complicated than the SMA.

The mathematical formula for measuring the EMA is recursive and, when the smoothing coefficient equals to n, it is:

EMA (n) = k * P(n) + (1-k) * EMA(n-1),

where

P (n) is the closing price of the current trading period,
EMA (n-1) is the value of the EMA calculated for the previous trading period, and k is the regulation coefficient.

The initial EMA (1) value is equal to the price of the first trading period taken into account, that is P (1). The higher the coefficient k is, the better the EMA curve approximates the chart, since the current prices are most important.

Thus, the opposing statement is true, that for the low regulation coefficient k value, more significance is attached to the prior trade periods. Depending on the trading platform, different coefficient values are used. In practice, the value 2/3 is used more often.

The EMA curves are interpreted in the same way as the SMA curves in Forex market analysis. They give similar signals of the market entry and exit. In the process of analysis, it is essential to know what regulation coefficient value is used by the trading platform. The EMA curves are more rapid in reaction to the price change when the coefficient value is higher; because they are attaching more weight to the current trading period. It is the most relevant in case of the flashy market changes at the moment of the economic news publications or the interventions of large Forex market participants.

The EMA curves are often exploited during the short-term trade, as they allow to determine quick price changes on the currency market. The SMA curves, on the contrary, are applied for the long-term trade, because they depict the long-term trends well. Therefore, the technical indicator choice depends on the trading experience, employed by the trader at a certain moment.