Exponential Moving Average

 

Introduction
An exponential (or exponentially weighted) moving average is calculated by applying a percentage of today’s closing price to yesterday’s 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 today’s closing price and multiply it by 9%. Next, you would add this product to the value of yesterday’s moving average multiplied by 91% (100% - 9% = 91%).

(Today’s Close * 0.09) + (Yesterday’s 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 percentages is:

You can use the above formula to determine that a 21-day exponential moving average is actually a 9% moving average:

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