Exponential moving average

An exponential moving average is a technical indicator to identify the trend and to generate buy and sell signals. An exponential moving average is a moving average that gives the most recent share prices a greater weight than older quotes.

An exponential moving average is more sensitive to changes in share price compared to a simple moving average but less sensitive compared to a weighted moving average. An exponential moving average can be calculated for different time periods, an exponential moving average can be calculated for 10 days, 20 days or 200 days for example.

Exponential moving average (20 days): price x (2 / (20 + 1)) + (the exponential moving average yesterday) x (1 - (2 / (20 + 1))

An exponential moving average that is calculated for more days than another exponential moving average is less sensitive to stock price changes. An exponential moving average is recalculated every day.

Exponential moving averages can be used to generate buy and sell signals. If one calculates a longer exponential moving average and a shorter exponential moving average, a buy signal or a sell signal is obtained when the shorter exponential moving average cuts through the longer exponential moving average.

The trend can be identified by the direction of the exponential moving average. An exponential moving average takes all historical share prices into account, quotes are not removed from the measure but are given progressively less weight.