Exponential Moving Average

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Description

An exponential (or exponentially weighted) moving average is calculated by applying a percentage of today's closing price to yesterday's moving average value.

Because most investors feel more comfortable working with time periods rather than with percentages, MetaStock Pro converts days into an exponential percentage. For example, if a 21-day exponential moving average is requested, a 9% moving average is calculated.

To calculate a 9% exponential moving average of IBM: First, we would take today's closing price and multiply it by 9%. We would then add this product to the value of yesterday's moving average multi­plied by 91% (100% - 9% = 91%).

The formula for converting days to exponential percentages is as follows:

For example, to calculate a 10-day exponential moving average, you would use 0.18:

To convert an exponential percentage into time periods, you would use the following formula:

Using our previous example, we can check to see that a 0.18 exponential moving average is actually a 10-day average.

The method used to calculate an exponential moving average puts more weight toward recent data and less weight toward past data than does the simple moving average method. This method is often called exponentially weighted.