In the previous article, I have discussed the simple moving average. Two types of moving average generally investors use for technical analysis EMA and SMA. So in this article, I will discuss what is EMA(Exponential Moving Average) and how Exponential moving average calculated. Also the difference between two indicators, and similarities.
The exponential moving average is an indicator that can help to see closer moving average Data of the current price. It’s Give more Weightage to recent days data as compared to the older days data. That’s why it’s always more changed with the current price. some Investors think recent data is more accurate that’s why they use EMA rather than using SMA.
Example: suppose you want to check the average price of 30 days if you are using a simple moving average then the price will be calculated like this .using simple moving average indicator every day’s price( it can be opening, high, low, or closing price) equally contributes to getting simple moving average Price.
But if you are using an Exponential moving average indicator. Then the latest day’s prices will contribute more to see EMA results.contribution of older periods/candles price is less as compared to the latest periods/candles prices.
Exponential moving average formula =Price (today)×α+EMA(yesterday)×(1−α)
Where, α=2÷ (n+1)
Here, n= total no of periods or total no of candles
For example if you want to calculate 10 periods value of α then calculation will be α=2÷(10+1), α=0.18
Difference between SMA and EMA
|Calculation||The calculation is very simple also the indicator will show you data.||The calculation is little critical to calculate But already indicator shows you Exponential price|
|Price||This indicator will not change fast with the current stock price compared to EMA||this indicator change faster with current stock price|
|Weightage||Its give equally weightage to every periods/candle prices while calculation||Give more weightage to recent periods/candle prices while calculation|
|Formula||Summation of total periods price/no of periods||Price (today)×α+EMA(yesterday)×(1−α)|
|Trader mind||some traders think recent data give lot’s of fake signal that’s why they use simple moving average indicator indicator||some traders think recent market data is more valuable with the current stock prices. That’s why they use an exponential moving average indicator|
The Similarities between SMA and EMA
|Similarities||Simple moving average/Exponential moving average|
|Stock trend||Both Indicators use to see stock trend|
|Data||Both indicators use historic data to calculate stock trends.|
|Uses||you can use both indicators at a time. some investors follow both indicators.|
|Help||both indicators use to find stock support zone, resistance zone. stock trend. It helps you to give stop loss. help you to enter and exit from the stock.|
|Analysis||Both are part of technical analysis.|
Exponential moving average or EMA will show you the Exponential Moving average of some period share price. it’s calculated by giving more weightage to the latest period share price and gives less weightage to the older period price, that why the average price is near to the current price.
Most of the traders use this EMA indicator because they think the latest period share price is more important than the older period share price data.
My thought: I also think that the latest period data is for informative than the older. in the share market price charges depend on the current development of the business that why current data is more important. historic data is also important to see the share price movement in the past. so that you can get an idea of how share price can move in the future.
*Read Related Post for more information.