Like the Simple Moving Average (SMA), Exponential Moving
Average is also used to define the direction of the trend of a security and,
secondly, used to recognize changes in the trend.
The difference however, is
that EMA gives more weight on more recent prices compared to the older prices.
This gives EMA the advantages of responding quickly to price fluctuations than
SMA.
During calculation, EMA is equal to the value of SMA on the
first day. On the succeeding days , however, EMA is calculated based on the formula below.
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| Fig. 1. A 10-day SMA and EMA Calculation |
FORMULA:
EMA = (Closing Price today – EMA yesterday) * k
+ EMA previous day
Where:
k = 2 / (No. of days
in EMA+ 1); this is called the smoothing constant
In the table in Fig. 1, shows the difference between a
10-day SMA and a 10-day EMA using the closing prices of AGI for the month of April 2013.