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The Exponential Moving Average (EMA) is a weighted moving average where the weighting is such that the recent days’ prices are given more weight than older prices. The theory behind this is that more recent prices are considered to be more important than older prices, particularly as a long-term simple average (for example a 200 day) places equal weight on price data that is over 6 months old and could be thought of as slightly out-of-date.
Calculation of the EMA is more complex than the Simple Moving Average but has a large record of data covering each and every closing price for the last 200 days (or however many days are being considered) does not have to be kept. All that is needed is the EMA for the previous day and today’s closing price to calculate the new Exponential Moving Average.
EMA = Price(t) * k + EMA(y) * (1 – k)
Where:
- t = today,
- y = yesterday,
- N = number of days in EMA,
- k = 2/(N+1)
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