An exponential (or exponentially weighted) moving average is calculated by applying a
percentage of todays closing price to yesterdays moving average value.
Exponential moving averages place more weight on recent prices.
For example, to calculate a 9%
exponential moving average of IBM, you would first take todays closing price and
multiply it by 9%. Next, you would add this product to the value of yesterdays
moving average multiplied by 91% (100% - 9% = 91%).
(Todays Close * 0.09) +
(Yesterdays Moving Average * 0.91)
Because most investors feel more
comfortable working with time periods, rather than with percentages, the exponential
percentage can be converted into an approximate number of days. For example, a 9% moving
average is equal to a 21.2 time period (rounded to 21) exponential moving average.
The formula for converting exponential percentages to
time periods is:
You can use the above formula to determine that a 9%
moving average is equivalent to a 21-day exponential moving average:
The formula for converting time periods to exponential
You can use the above formula to determine that a 21-day
exponential moving average is actually a 9% moving average: