{"id":9576,"date":"2022-10-12T07:59:12","date_gmt":"2022-10-12T07:59:12","guid":{"rendered":"https:\/\/mdr.foobrdigital.com\/?p=9576"},"modified":"2022-10-12T07:59:12","modified_gmt":"2022-10-12T07:59:12","slug":"exponential-moving-average-ema-explained","status":"publish","type":"post","link":"https:\/\/mudassirbackup.infinitycodestudio.com\/index.php\/2022\/10\/12\/exponential-moving-average-ema-explained\/","title":{"rendered":"Exponential Moving Average (EMA) Explained"},"content":{"rendered":"\n

As we said in the previous lesson, simple moving averages can be distorted by spikes. We\u2019ll start with an example.<\/p>\n\n\n\n

Let\u2019s say we plot a 5-period SMA on the daily chart of EUR\/USD.<\/p>\n\n\n\n

\"5-SMA<\/a><\/figure>\n\n\n\n

The closing prices for the last 5 days are as follows:<\/p>\n\n\n\n

Day 1: 1.3172<\/p>\n\n\n\n

Day 2: 1.3231<\/p>\n\n\n\n

Day 3: 1.3164<\/p>\n\n\n\n

Day 4: 1.3186<\/p>\n\n\n\n

Day 5: 1.3293<\/p>\n\n\n\n

The simple moving average would be calculated as follows:<\/p>\n\n\n\n

(1.3172 + 1.3231 + 1.3164 + 1.3186 + 1.3293) \/ 5 = 1.3209<\/pre>\n\n\n\n
Simple enough, right?<\/p>\n\n\n\n
Well, what if there was a news report on Day 2 that causes the euro to drop across the board.<\/p>\n\n\n\n
This causes EUR\/USD to plunge and close at 1.3000. Let\u2019s see what effect this would have on the 5-period\u00a0SMA.<\/p>\n\n\n\n
Day 1: 1.3172<\/p>\n\n\n\n
Day 2: 1.3000<\/strong><\/p>\n\n\n\n
Day 3: 1.3164<\/p>\n\n\n\n
Day 4: 1.3186<\/p>\n\n\n\n
Day 5: 1.3293<\/p>\n\n\n\n
The simple moving average would be calculated as follows:<\/p>\n\n\n\n
(1.3172 + 1.3000<\/strong> + 1.3164 + 1.3186 + 1.3293) \/ 5 = 1.3163<\/strong><\/pre>\n\n\n\n
The result of the simple moving average would be a lot lower and it would give you the notion that the price was actually going down when in reality, Day 2 was just a one-time event caused by the poor results of an economic report.<\/p>\n\n\n\n
The point we\u2019re trying to make is that sometimes the simple moving average might be too<\/em> simple.<\/p>\n\n\n\n
If only there was a way that you could filter out these spikes so that you wouldn\u2019t get the wrong idea.<\/p>\n\n\n\n
Hmm\u2026 Wait a minute\u2026 Yep, there is a way!<\/p>\n\n\n\n
It\u2019s called the Exponential Moving Average<\/strong>!<\/p>\n\n\n\n
Exponential moving averages (EMA) give more weight to the most recent periods.<\/p>\n\n\n\n
In our example above, the EMA<\/a> would put more weight on the prices of the most recent days, which would be Days 3, 4, and 5.<\/p>\n\n\n\n
This would mean that the spike on Day 2 would be of lesser value and wouldn\u2019t have as big an effect on the moving average as it would if we had calculated for a simple moving average.<\/p>\n\n\n\n
If you think about it, this makes a lot of sense because what this does is it puts more emphasis on what traders are doing recently.<\/p>\n\n\n\n
Exponential Moving Average (EMA) vs. Simple Moving Average (SMA)<\/h2>\n\n\n\n
Let\u2019s take a look at the 4-hour chart of USD\/JPY to highlight how a simple moving average (SMA) and exponential moving average (EMA) would look side by side on a chart.<\/p>\n\n\n\n
\"Exponential<\/a><\/figure>\n\n\n\n
Notice how the red line (the 30 EMA) seems to be a closer price than the blue line (the 30 SMA).<\/p>\n\n\n\n
This means that it more accurately represents recent price action. You can probably guess why this happens.<\/p>\n\n\n\n
It\u2019s because the exponential moving average places more emphasis on what has been happening lately.<\/p>\n\n\n\n
When trading, it is far more important to see what traders are doing NOW rather than what they were doing last week or last month.<\/p>\n","protected":false},"excerpt":{"rendered":"
As we said in the previous lesson, simple moving averages can be distorted by spikes. We\u2019ll start with an example. Let\u2019s say we plot a 5-period SMA on the daily chart of EUR\/USD. The closing prices for the last 5 days are as follows: Day 1: 1.3172 Day 2: 1.3231 Day 3: 1.3164 Day 4: […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[869],"tags":[],"_links":{"self":[{"href":"https:\/\/mudassirbackup.infinitycodestudio.com\/index.php\/wp-json\/wp\/v2\/posts\/9576"}],"collection":[{"href":"https:\/\/mudassirbackup.infinitycodestudio.com\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/mudassirbackup.infinitycodestudio.com\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/mudassirbackup.infinitycodestudio.com\/index.php\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/mudassirbackup.infinitycodestudio.com\/index.php\/wp-json\/wp\/v2\/comments?post=9576"}],"version-history":[{"count":0,"href":"https:\/\/mudassirbackup.infinitycodestudio.com\/index.php\/wp-json\/wp\/v2\/posts\/9576\/revisions"}],"wp:attachment":[{"href":"https:\/\/mudassirbackup.infinitycodestudio.com\/index.php\/wp-json\/wp\/v2\/media?parent=9576"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/mudassirbackup.infinitycodestudio.com\/index.php\/wp-json\/wp\/v2\/categories?post=9576"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/mudassirbackup.infinitycodestudio.com\/index.php\/wp-json\/wp\/v2\/tags?post=9576"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}