STOCK EXCHANGE MATHEMATICS

NOOR AZIZAH

5/19/2012

“EXPONENTIAL MOVING AVERAGE”

Critics argue, Simple Moving Average is too simple because it gives equal weight to each data. They view the most recent data should be given greater weight in the formula because it is more relevant to the future price movements. To solve this problem, made ​Exponential Moving Average (EMA), which gives greater weight to recent data in calculating the moving average.

5/19/2012

“EXPONENTIAL MOVING AVERAGE”

5/19/2012

“EXPONENTIAL MOVING AVERAGE”

The formula to calculate an exponential moving average is as follows:

The coefficients α represents the degree of weighting decrease, a constant smoothing factor between 0 and 1. A higher α discounts older observations faster. Alternatively, α may be expressed in terms of N time periods, where α = 2/(N+1).

5/19/2012

“EXPONENTIAL MOVING AVERAGE”

The following shows the calculation results of exponential moving average on Eastman Kodak stock. For the first period EMA, the calculation is used as a simple moving average of the previous period EMA (yellow block to the period-10). Of period-11 forward, the next period of the previous EMA will be used in the calculations. The calculation of the period-11 broken down as follows:

5/19/2012

“EXPONENTIAL MOVING AVERAGE”

Example, table:

5/19/2012

“EXPONENTIAL MOVING AVERAGE”

Example, graphic:

5/19/2012

“EXPONENTIAL MOVING AVERAGE”

The difference between SMA and EMA

For this example, which uses only 20 days of the data market, the difference is minimal, although still distinct. Exponential moving average is consistently closer to the actual price. On average, closer EMA 3/8 points to the actual price of the SMA.

5/19/2012

“EXPONENTIAL MOVING AVERAGE”

5/19/2012

“EXPONENTIAL MOVING AVERAGE”

Simple Moving Average

Exponential Moving Average Move quickly and well to show the latest price changes. More prone to get a false signal

Pro

Featuring subtle graphics that eliminates false signals. Moving slowly, which can lead to signal late in the buying and selling

Kontra

5/19/2012

“EXPONENTIAL MOVING AVERAGE”

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