Exponential Moving Averages

Exponential Moving Averages explained by professional Forex trading experts the “Exponential Moving Averages” FX trading team.

Exponential Moving Averages?

One of the first indicators that most traders will learn when finding the fascinating field of Technical Analysis is the Moving Average. Moving Averages can have multiple purposes, and can be used in a variety of ways; often-times depending on the trader’s goals.

Price, of any asset, will rarely exhibit a directly linear pattern. In most cases, price will oscillate in both directions – even in strong uptrends or strong downtrends. The moving average can often help the trader ‘smooth,’ these candle-to-candle fluctuations to arrive at an ‘average,’ value.
In the GBP/USD Daily chart above, you are seeing the 200 period Simple Moving Average applied. This is one of the more common moving averages that’s used by Technical Analysts. Notice that the trend is to the up-side for most of the observed period. The Moving Average assists the trader by taking the short-to-intermediate term oscillations, and averaging those with the bullish price movements to plot this as a ‘smoothed price.’

The calculation of the above Simple Moving Average is fairly easy. The value for the Moving Average of the current candle above can be calculated by taking the most recent 200 closing prices, adding them together, and then dividing by 200.

As new prices trend higher, these higher values will then assist in increasing the value of the MA (albeit marginally, as the new higher price is only 1/200th of the moving average).

Now you may notice, by the very nature of the indicators, Moving Averages will ‘lag,’ price. If price doubles this bar, once again, it will only have a marginal impact on the Moving Average because the new price (at double the previous price) is only 1/200th of the calculation.

This is where the Exponential Moving Average (also known as EMA) can help. It’s important to note, the issue of lag can never be completely removed from Moving Averages, as the indicator is always going to lag the market by the nature of its composition. But traders can attempt to mitigate this downside, and one of the ways of doing so is the EMA.

With the Exponential Moving Average, a heavier ‘weighting,’ is used on more recent values – grading the recent changes in price more heavily than later changes in price.

In the example above in which price doubled today, the EMA should reflect more of this movement than the Simple Moving Average, as additional ‘weight,’ is being assigned to the current bar.

Below is the same chart we had looked at above, but this time it has a 200 period EMA, as well as the 200 period Simple Moving Average.

Exponential Moving Averages Conclusion

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