Exponential Moving Averages
A Moving Average is an indicator that shows the average value of a security's price over a period of time.
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%).
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:
In the following example, the Exponential Moving Average line is the red line.
The strategies described in this article are for information purposes only, and their use does not guarantee a profit. None of the information provided should be considered a recommendation or solicitation to invest in, or liquidate, a particular security or type of security. Investors should fully research any security before making an investment decision. Securities are subject to market fluctuation and may lose value.