Indicators  |  JUN 2008

Examining the EMA by Tim Treloar

Examining the EMA by Tim Treloar You know how to apply the exponential moving average, but what do you know about its development and behavior? Here’s a deeper look at the popular moving average. The popular exponential moving average (EMA) depends on data to develop its distinctive characteristics, and when it comes to data, more is better. But before you put an EMA to work as a technical indicator, a deeper understanding of its development and behavior is advised. At the very least, a deeper understanding will justify the practical application of it and at most dispel some misconceptions associated with it. IN THEORY An EMA is essentially a type of weighted average. The idea of a weighted average is simple: each element in a collection of numerical data is multiplied by a number ranging from zero to 1 (the decimal equivalent of the percentile range zero to 100), called a weight, such that the sum of the weights always totals 1, and the weighted elements are then added together. A simple moving average (MA) is perhaps the simplest example of a weighted average in that all the elements receive exactly the same weight. In an exponential moving average, the weight of each element decreases progressively, usually according to its age and usually by powers of a particular factor.

by Tim Treloar