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Exponential Moving Average

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An exponential moving average is a more complicated form of a simple moving average, which calculates the average price of a security over a specific period of time. The exponential moving average gives more weight to the latest (most recent) price data and gives less weight to the older, more historical data. For example, in a 10-day exponential moving average, the most recent 5 days have more value than the first 5. An exponential moving average actually reacts faster to recent price changes than a simple moving average. The idea behind the exponential moving average is that it provides stronger and earlier trend detection. The exponential moving average's method of giving more weight to recent data is essentially an attempt to reduce the lag of the simple moving average. One method for calculating an exponential moving average (EMA) takes a percentage (P) of today's total price (T) and adds in the prior day's exponential moving average (Y) times 1 minus that percentage: (T*P)+(Y*(1-P)) = EMA. The exponential percentage (P) used to calculate an exponential moving average equals 2/(time periods+1).



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