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.

Calculation

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:


Sample Chart

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.