Definition of EWMA (Exponentially Weighted Moving Average)

The Exponentially Weighted Moving Average (EWMA) refers to

an average of data used to track the portfolio’s movement by
checking the results and output by considering the different
factors and giving them the weights. Then, tracking results to
evaluate the performance and make improvements.
Weight for an EWMA reduces exponentially for each period
that goes further in the past. Also, since EWMA contains the
previously calculated average, hence the result of the
Exponentially Weighted Moving Average will be cumulative.
Because of this, all the data points will contribute to the
result, but the contribution factor will go down as calculated
in the next EWMA period.

Table of contents

 Definition of EWMA (Exponentially Weighted Moving

Average)
o Explanation
o Examples of EWMA
 Example #1
 Example #2
o Advantages
o Limitations
o Important Points
o Conclusion
Explanation

This EWMA formula shows the value of the moving average at a time t.

EWMA(t) = a * x(t) + (1-a) * EWMA(t-1)

Where

 EWMA(t) = moving average at time t

 a = degree of mixing parameter value between 0 and 1
 x(t) = value of signal x at time t

This formula states the value of moving average at time t. Here, a parameter
shows the rate at which it will calculate the older data. The value of a will be
between 0 to 1.
Suppose a=1 means only the most recent data used to measure EWMA. If a is
nearing 0, that means more weightage is to older data. If a is near 1, newer data
has given more weightage.

Examples of EWMA

Below are the examples of Exponentially Weighted Moving

Average
Example #1
Let’s consider 5 data points as per the below table:

Time (t) Observation (x)

1 40

2 45

3 43

4 31

5 20

And parameter a = 30% or 0.3

So EWMA(1) = 40
 EWMA for time 2 is as follows

 EWMA(2) = 0.3*45 + (1-0.3)*40.00

 = 41.5

Similarly, calculate the exponentially weighted moving

average for given times:

EWMA(3) = 0.3*43 + (1-0.3)*41.5 = 41.95

 EWMA(4) = 0.3*31 + (1-0.3)*41.95 = 38.67

 EWMA(5) = 0.3*20 + (1-0.3)*38.67 = 33.07
  Example #2
 We are having the temperature of a city in degrees Celsius from Sunday to
Saturday. Using =10%, we will find the moving average temperature for each day of
the week.Using a =10%, we will find an exponentially weighted moving average for
each day in the below table:

Temperature oc (x)
Weekday (t)

Sunday 24

Monday 30

Tuesday 36

Wednesday 25

Thursday 22

Friday 29

Saturday 30
Using a =10%, we will find an exponentially weighted moving average for each day in the
below table:

Below is the graph showing a comparison between the actual temperature and EWMA

As we can see, smoothing is quite strong, using =10%. In the

same way, we can solve the exponentially weighted moving
average for many kinds of time series or sequential datasets.
 Advantages

 One can find average using an entire history of data or output. All other charts
tend to treat each data individually.
 Users can give weightage to each data point at their convenience. One can
change this weightage to compare various averages.
 EWMA displays the data geometrically. Because of that, data doesn’t get affected
much when outliers occur.
 Each data point in the Exponentially Weighted Moving Average represents a
moving average of points.

Limitations

 One can only use it when continuous data is available.

 One can use it only when we want to detect a small shift in the process.
 One can use this method to calculate the average. Monitoring variance requires
the user to use some other technique.

Important Points

 We want to get an exponentially weighted moving average for data that we want
to be time ordered.
 It is beneficial in reducing noise in noisy time series data points, which can be
called smooth.
 Each output is given a weightage. The more recent data is, the highest weightage
it will get.
 It is quite good at detecting smaller shifts but slower at detecting large ones.
 One can use it when the subgroup sample size is greater than 1.

 One can use this method in chemical and day-to-day accounting processes in the
real world.
 One can also use it to show website visitors’ fluctuations on days of the week.

Conclusion
EWMA is a tool for detecting smaller shifts in the mean of the time-bound
process. An exponentially weighted moving average is also highly studied and
used as a model to find a moving average of data. It is also very useful in
forecasting the event based on past data.

The Exponentially Weighted Moving Average is an assumed basis that

observations are normally distributed. It considers past data based on their
weightage. As the data is more from the past, its weight for the calculation will
decrease exponentially.
Users can also give weight to the past data to find a different set of EWMA basis
different weightage. Also, because of the geometrically displayed data, data
doesn’t get affected much because of the outliers. Hence, more smoothed data
can be achieved using this method.