Info 1: exponential moving average definition
Info 2: how exponential moving average works
Info 3: Previous EMA vs smoothing factor
Info 4: Formula for EMA
Opening information:
Exponential moving average breaks into three words. Exponential means rapid increase, moving means the action of arriving from one place to another, and average means normal.
Exponential moving average means normally moved rapidly increased tool. So now let’s have a look at what is an EMA, how it works, and what is the difference between the Previous EMA and the smoothing factor, finally formula of the EMA.
Info 1: Exponential moving average definition
Mr.Nakiel is a short-term trader who had an experience of 12 years trading public securities, he already made hundreds and thousands of dollars using his strategy.
His main strategy takes place on using the technical tools that provide a single based on which side is more favorable and weight for turning point forward future.
If such a tool shows the signal for more weight for the upside it’s he places the trade for the buy side or if the same tool emphasizes the downside he would place the trade for a short position.
Here the technical tool which is used by Mr.Nakiel is what named an exponential moving average (EMA). Because many of the technical
equipment that had a function on calculating the moving average in the manner of rapid smoothen value is what is called an Exponential moving average.
If the calculation won’t add the value for extra rapid value in the calculation of the moving average, then it’s not categorized as an EMA. So let’s dive into how the EMA calculation is involved and works in the public market.
Info 2: works of exponential moving averages
The exponential moving average doesn’t represent any of the specific things or objects, instead, it’s a technical analysis tool that is used by any kind of trader to speculate on security.
This tool exponential moving average (EMA) would be calculated using the four components. One is the use of close price, another one previous EMA, next one is the smoothing factor and periods.
Before finding and implementing the calculation for the exponential moving average, one needs to understand the four components very deeply, that are required for EMA calculation.
The close price demonstrates the amount of price that would end in the last previous session of the market time.
The next thing is a previous EMA, we don’t even know what is EMA. then how did we know the previous EMA, so the previous EMA value would be a simple moving average (SMA) value for the first initial taken calculation? Don’t mix there is no previous EMA value for the first calculation, indeed use the SMA for the initial sum calculation.
Moreover third is the smoothing factor or smoothing constant, The smoothing factor means increasing the value of any number with one to smooth the value of the calculation. So the calculation takes place for 2 or more numbers instead of one.
The last component would be the period this period is all about how many days that calculation needs to be taken to find the EMA. Using these four components the EMA calculation would take place to arrive at the correct value.
Before summing up the final value for the EMA calculation, the indicator would be to find the smoothing factor by dividing the smoothing factor 2 and the number of periods that need to be calculated.
If the indicator is enforced to find the smoothing factor for the 7 days then the EMA takes place for the 8th day. So the calculation for the smoothing factor takes in the manner of 2/ numbers of period+1.
Smoothing constant = 2÷ 7+1 = 2÷8 = 0.25, this smoothing the value of EMA answer and this smoothing value would be called by different names such as weighting multiplier, smoothing factor, smoothing constant extra… But all of them are the same things.
We already summed up the third component smoothing factor and fourth components period and we know that something factor for 8 days would be 0.25. Next, let’s differentiate and sum the first and second components with a smoothing factor to find the EMA for 7 days.
Info 3: Previous EMA vs smoothing factor
Subtraction of the closing price with a previous EMA ( use the simple moving average for the initial calculation for instead of the previous EMA). This shows how much simple
moving average is high or low after subtracting with recent close.
On the other side, add the smoothing factor with the previous EMA ( we already had been told that for the first calculation, the previous EMA would be SMA for the need calculation period)
Once the sum is finished subtract the closing price from the previous EMA and add it smoothing factor to the previous EMA. Sum together to EMA, to make more clear about EMA Final value, let’s look into one brief example below.
Info 4: example of EMA
To finalize the EMA value the calculation needs two things this formula takes place like this
EMA=(closing price − previous day’s EMA)× smoothing constant+ previous day’s EMA
The indicator would subtract the closing price from the previous day’s EMA, then multiply with the smoothing factor that’s added to the previous day’s EMA.