The exponential average is a variant of the moving average. In an exponential moving average, the price action in the most recent trading periods has more weight in the calculation.
We can make this lesson on exponential moving averages really difficult to understand, but in reality, there is no need to do so. How the exponential moving average operates is far more important than how to do the math behind the exponential moving average. Why do we ignore the mathematics? Because your broker’s trading and charting platform does the calculations for you, anyway.
Exponential Moving Averages
An exponential moving average helps to make the simple moving average more applicable to the current trading environment. When you use an exponential moving average, you’re using a moving average that “weights” more heavily the recent prices of a currency pair than it does older prices of the currency pair.
This means that the exponential moving average is more responsive to changes in the currency pair value. The chart below will help this concept make sense. The blue line is the exponential moving average; note how it moves more quickly. The red line is the simple moving average; notice how it responds slower than the exponential moving average.
Both moving averages use the same 10 periods in their calculation. However, the exponential moving average is faster to respond to new trend changes, as you can see.
In weighting the recent activity greater than longer periods, traders can still use the averaging data from much older periods while still keeping a watchful eye on what is happening in the short-term.
Additionally, the exponential moving average helps to smooth out big movements in a currency price that were part of older market movements. Naturally, traders who use the EMA want to know about the past movements in the market. However, more important is what happens most recently.
It all makes perfect sense!
Choosing a moving average
When it comes to indicators and analysis, we all have a favorite. We can admit it. However, picking and choosing our favorites isn’t always necessary with simple and exponential moving average. In the next article, we’ll compare the two, and then give you some ways that you can use the simple and exponential moving averages for successful trading!
