What is Exponential Moving Average (EMA)?
The Exponential Moving Average is a type of moving average that gives more weight to recent prices, making it more responsive to new information than a Simple Moving Average.
Exponential Moving Average (EMA) Explained
The EMA reacts faster to price changes than the SMA, which makes it preferred by short-term traders. The most common EMAs are the 12-period and 26-period for MACD calculations, and the 9-period and 21-period for short-term analysis. The weighting multiplier is calculated as 2 / (period + 1).
Real-World Example
A 20-day EMA gives approximately 9% weight to the most recent price versus only 5% for a 20-day SMA. This means the EMA will turn faster when the trend changes, providing earlier signals but also more false signals.
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